Speaking to Citywire Selector, Citywire AAA-rated Kochar and co-manager Kumar, who run the Threadneedle American Absolute Alpha and Threadneedle American Extended Alpha funds, said efforts to cut back on positions had already proved positive.
‘One measure that we have taken in the last nine months is that we have cut down on the number of names in the portfolio and we have become a lot more contained, which has really helped performance.
‘We are in an environment where we think there is added volatility from central banks and policy changes. Our strength is stock selection and we are trying to pick companies that will do well in these environments,’ Kumar said.
Kochar said the pair has cut holdings from 90 to 80 over the past few months, which he viewed as a ‘significant decrease’ and one which would aid performance.
On a three-year basis the American Absolute Alpha fund lost 3.5% against an average manager return of 4% in the Alt Ucits – Long/Short Equity sector.
Financials in favour
The fund currently has a 9.1% long position in the financial sector against a 1.4% short exposure. Kochar and Kumar said these positions contributed positively to performance.
'Our allocation to the financial sector went up in the months of September and October and has stayed up, which is something we did this pre-election.’
Kumar said the team increased the allocation to financials as they believe a possible repeal or an easing of Dodd-Frank rules and capital requirements would further improve the return on equity outlook, and drive higher valuation multiples for bank stocks.
‘We increased our position in Goldman Sachs and we also added to our positions in Bank of America, JP Morgan, and PNC Financials - yield curve steepening post the election was good for banks with high GAP ratio.’
Buying on weakness
Moving into 2017, the duo also added to their long holding in Costco, with 1.7% of the fund allocated to the membership retailer. Kochar said the softer sales trends the company recently experienced would improve.
‘Costco was able to successfully make the switch from Amex to Visa cards and get a much better deal for itself and its customers; the monetary benefit impact to Costco is still not fully appreciated by the market.
‘Costco’s high-velocity model is validating in an Amazon retail world and it has a number of catalysts to keep the risk-reward favourable such as; potential US/Canadian fee increase and special dividends could provide additional upside.’
Back in June, the pair bought Time Warner Cable due to share price weakness and followed this method to purchase building materials company, Sherwin Williams recently.
This was done as as the market grew concerned about the company’s growth, Kumar said. The team also added to holding at the beginning of this year.
'Sherwin saw a positive inflection with mid-single growth in the fourth quarter and guided quarter one sales growth of mid to high single digits.
'Sherwin also indicated that they would have to divest less than $650 million to get FTC (Federal Trade Commission) approval on the Valspar deal. The company should also benefit from the potential increase in infrastructure spending and corporate tax reduction.'