BlackRock European Absolute Alpha

The BlackRock European Absolute Alpha fund invests across Europe, including the UK, seeking to generate positive returns in a variety of market environments. Tom Lemaigre uses the strategy's flexible long/short mandate to identify stock-specific opportunities on both the long and short side of the market, aiming to benefit from both rising and falling share prices.

The fund has a risk-focused approach. The managers are looking for low correlations to other asset classes and low volatility. When building the portfolio, Stefan and Stephanie make use of the 19-strong European equity team to help with ideas. They are all experienced stock pickers with a range of different sector specialisms. They are looking for a mix of different characteristics in their long and short ideas. For the ‘longs’, they will want good management teams, a business with an historically high return on invested capital, good free cash flow and an ability to preserve capital through difficult cycles. For ‘short’ ideas, they are looking for structurally challenged businesses, with limited pricing power, high leverage and the potential to be disrupted.

These ideas originate from a mixture of sources, including company meetings, internal knowledge and external research. The highest conviction shorts often start with accounting red flags identified in the process.

All ideas are discussed at the team’s morning meeting. If they seem interesting, they will go into the research pipeline where an analyst will write a full report on the company. This is very thorough, encompassing a full financial review, inputs on management quality, reports from industry experts and data on suppliers and customers. It is also where the ESG factors are input and analysed. The team is also making increased use of alternative data in the process. BlackRock has a team of data scientists to provide input into the analysis process and provide one more factor to look at in order to try and gain an informational edge.

All of this culminates in a stock rating system from 1-5, with specific price targets over multiple time periods. This price target will help Stefan and Stephanie pick their longs and their shorts. This score is a guide, rather than a rule, to investing. The sizing of positions is led by the managers’ conviction in the idea, as well as looking at inputs on risk and the price targets set in the valuation approach. They constantly review positions to make sure the investment case still holds up, and that they hold companies for the right reasons.

For individual positions, the maximum long can be up to 5% of the portfolio, and a short at -3%. The managers can go up to ±25% long or short across the portfolio, making gross exposure a maximum of 150%. The process is designed to perform in all market environments with a focus on capital preservation, meaning the managers are looking to protect more than to excel. This may result in the fund performance being more modest than some of its more high-octane peers.

ESG - Integrated  

Blackrock’s well-resourced European team has a consistent and sophisticated ESG analysis system built into the investment process. It has specific risk inputs undertaken by analysts, and the output is highlighted as a prominent section of the stock research template. The key risks revolve around governance - such as audit quality, executive pay and ownership structures. There are also environmental factors on toxic emissions and waste, and social concerns on factors such as labour management. Specific scores are provided on each stock for other key ESG issues, such as carbon metrics, which are provided by third party data. These scores do not preclude investment, with Stefan and Stephanie having flexibility to choose, but the inherent risks are made very prominent. Firms with ESG issues may also be a source of short ideas for the portfolio, turning these risks into opportunities.