C F Ec l e c ti ca

Ab s o l u te Ma c ro F u n d
Performance Attribution Summary

Performance (%) - A shares

1 Month

3 Months

YTD

Inc.

2.9

12.1

10.3

27.2

The Fund recorded a net gain of +2.9% in February, bringing

the year to date return to +10.3%.
130

European equity holdings were the main drivers of strong

performance, contributing +3.2% in aggregate as stock
markets across the continent surged higher.
Gains came from DAX index futures (+1.6%), as well as
more micro driven strategies within pharmaceuticals
(+0.9%), telecoms (+0.4%) and our Italian banks RV position
(+0.3%).
Equity holdings outside of Europe added a further +1.9%,
with positive returns from Japanese robotics (+0.8%), global
tobacco stocks (+0.6%), and Chinese index positions
(+0.5%).
US dollar exposure cost -0.5% and, in fixed income trading,
our holding in the US 30-year Treasury gave back -1.3% as
yields moved sharply higher during the month.

Manager Commentary
So much is written about China, and of late very little has been
bullish. The notion of impending renminbi devaluation has taken
root as traders worry that the dollar rally has pulled its reluctant
Chinese counterpart higher, especially against the euro and the
yen. Indeed, it seems that shorting the renminbi has become
the new equivalent to the JGB short in macro circles. But having
shared these doomsday prophecies back in 2010, when the
consensus was less negative, I have recently become less
concerned about China. Heres why.
First China has recalibrated its growth model. Between 2001
and 2011, China had a very comparable decade to the US
economy during the 1920s. Both boomed on surging
productivity, high returns on capital, massive gross fixed capital
formation and a fervent desire by the rest of the world to
participate. We know that both economies should have boomed;
indeed they did. However I would contend that they should have
boomed even more.
That they didnt was because of hawkish macro policy. In the
1920s, the Fed refused to allow the high powered money
entering its economy via the gold standard to boost credit
further. The Chinese discriminated against their household
sector: the currency was never allowed to appreciate as much
as the boom justified; wages never fully captured the dramatic
gains in productivity; and real interest rates were consistently
negative. Together, these measures robbed the household of
anything between 5% and 7% of GDP per annum, statistically
depressing incomes share of GDP and hence boosting
involuntary saving. No one really complained, everyone felt
better off, but they could have done even better.

120
110
100
90
80

Past performance is not a guide to future returns.

Calculation on NAV basis with net income reinvested. Shares net of fees and expenses.

Monthly Returns Since Inception (%)

J

2010

1.2

0.4

-0.5

-0.7

-0.3

-0.2

-1.5

5.4

-0.3

-2.0

0.5

1.7

3.6

2011

-1.8

1.4

-1.7

-0.1

2.8

-0.1

2.1

3.2

1.5

0.2

-0.2

1.1

8.6

2012

-1.0

0.1

-1.9

1.7

1.4

0.7

2.6

-1.0

0.2

-2.2

0.5

-1.4

-0.4

2013

0.9

1.1

2.4

-0.5

-2.3

-1.2

-1.1

0.0

-1.8

0.1

0.7

2.7

0.8

2014

-3.6

1.1

-5.6

-1.7

0.3

0.4

-1.0

-1.2

2.5

0.6

9.3

1.7

2.1

2015

7.2

2.9

10.3

Monthly Performance Attribution

Equities (Net)

4.9%

Commodities

0.0%

FX

-0.5%

Fixed Income

-1.4%

Fees

-0.1%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

Internal estimate based on calendar month P&L.

Asset Allocation (% NAV)

140
120
100
80
60
40
20
0

105.9

111.1
71.9

Ftrs *
52.1

27.5

53.8

Equity

FX

FI

Cash

5.1

0.0

Ftrs Margin

Opt Prem
(Net)

* Futures positions are included on a deltad basis. Equity index options are represented as premium.
Fixed Income positions are included on a 10yr adjusted (deltad) basis.

Top 10 Holdings (% NAV)

US 30yr Bond

59.4

USD Index Ftrs

9.2

DAX Ftrs

27.9

Long USD / Short PLN

7.1

Long USD / Short TWD

23.2

Long USD / Short HUF

7.1

Long USD / Short SGD

13.8

Long USD / Short CAD

6.8

Hang Seng CEI Ftrs

12.3

Long EUR / Short PLN

6.7

Futures/options positions are included on a deltad basis.

Interest rate/bond positions are included on a 10yr adjusted (deltad) basis.

C F Ec l e c ti ca
Ab s o l u te Ma c ro F u n d
However, with the rest of the world now languishing from
insufficient demand, the policy is no longer practical and policy
makers have acted consistently and repeatedly for the last two
years to change this. The hand brake on Chinese household
incomes has been lifted as the country pursues a different
growth model. Clearly the currency is no longer deemed
undervalued, and the surge in both the dollar and the renminbi
has produced a tremendous
redistribution in the
global
economy enriching US households and mainland
Chinese consumers. Real and nominal interest rates are now
high, and wages have been capturing more of the productivity
bounty. Consumer spending is strong and probably underpins
something like 4% GDP growth on its own. Why should policy
makers undermine the one reliable motor of economic growth
by choosing to devalue their currency? It just doesnt add up.

seems to match the devastation in their terms of trade as their

important raw material exports have suffered from tremendous
deflation with no meaningful offset in other inputs.
Figure 1: Terms of Trade (Red, RHS) vs. Trade Weighted
Index (Blue, LHS)
-9
-11

95

China

Nevertheless, economists have fretted as the renminbi has

appreciated alongside the US dollar. The fear is that this will hit
an already vulnerable domestic economy with a sharp reduction
of the trade surplus. Valuing currencies is notoriously difficult as
I tried to explain in my November report. Nevertheless I find it
hard to demonstrate that the currency issubstantially overvalued
at a qualitative level. To start with, the trade surplus has gone
on to reach a record nominal high. You may observe that this
can be partly put down to a fall in the price of imports (of which
more below), but Chinas competitiveness in export markets
seems to remain strong with its market share of global exports
continuing to rise. Domestically, unemployment remains low in
the major conurbations, and the GDP growth rate, whilst
slowing and subject to the great bluster of its politically
motivated national accounts methodology, still seems much
healthier than elsewhere in the world.
Perhaps it is more useful to look at the terms of trade. It has
certainly done a good job at explaining the differentiation of
emerging market currency moves over the last 18 months. The
huge decline in Chinas raw material costs, especially the slump
in both iron ore and oil, have massively improved the countrys
standing and the trade weighted currency has appreciated in
tandem; it may be as simple as that. The same can be said for
India where only the central banks accumulation of foreign
exchange reserves has prevented further appreciation. In
contrast, the free-fall in the currencies of Russia and Brazil

85

90
85

-13

75

80

125
-15

75
65
70

-17
120
-19

65

55

60
-21

115

45

-23
-25

Second, at the macro level not all countries are born equal. A
select group of nations the US, core European countries,
Japan - belong to an elite Tier One macro community. These
countries have large non-tradable sectors and as demonstrated
by the adoption of QE, have the firepower to determine interest
rates without being constrained by the fear of inflation from a
weakening currency. The appeal of China today rests on its
graduation to this community. China is no Mexico, an oil
exporting country feeling under pressure to raise interest rates
in the face of a slowing economy and worsening terms of trade
precisely because it fears the consequences of losing control of
the peso. Rather, China seems to belong in the same camp as
the US, Europe and Japan, the countries with the scope to
determine their own monetary policy.

130

-26

India

55
50

35

45

82

90

81

110

-24

Russia

85

-28

80

-30

79

-32

78

-34

77

-36

76

-38

75

-5

-40

74

-7

3
80

1
-1

75

-3
70

Brazil
65

TSource: Bloomberg/EAM.
Of course, the real bugbear for those less disposed to Chinas
prospects concerns the management of its currency peg with
the US dollar. The combination of a bearishly disposed
international macro community and the desire of businesses
operating within China to hedge their FX exposure has pushed
the currency to the top of its regulated trading band. The upshot
of this has been that the PBOC has had to intervene: buying
renminbi and selling dollars. This of course drains the Chinese
economy of liquidity as can be seen by rate movements. For
instance, despite two rate cuts and a reserve ratio reduction, the
seven-day repo has risen 140bps to 4.8%. The withdrawal of
liquidity can also be seen in the 10% fall in Shanghai A shares
from the start of year to mid-February. Perhaps the macro
community is right to worry after all?
Not so fast. Remember China is the only Tier One economy
not trapped by the zero lower bound, domestic interest rates are
high by international standards and China has ample scope to
reduce rates further. Indeed the policy looseness announced
since last Novembers first cut has pushed stock prices higher
and the one year forward repo rate trades at 3.6% which
suggests that domestic investors perceive this to be a
temporary tightness in liquidity which will ultimately be
addressed by the authorities.
Several years ago when seeking to chronicle the likely
sequencing of crisis as deflationary forces swept across the

C F Ec l e c ti ca
Ab s o l u te Ma c ro F u n d
globe we proclaimed "US first China last. This has stood the
test of time. Deflationary shocks in each of those economies
caused sharp sell-offs in local financial markets, and brought
forth a policy response which proved extremely beneficial for
investors in those countries. Today, the global deflationary
surge has finally humbled the Chinese growth engine,
transforming the community of macro investors into bears. The
market having fallen 75% from its peak had discounted the bad
news and indeed was increasingly pricing in the possibility of
bankruptcy. However the shift in policy to favour the private
sector has probably averted such a catastrophic outcome, and
with further policy loosening to come the equity market is
starting to value these businesses as ongoing concerns with
modest price earnings multiples once more. Stocks have rallied
35% on two small rate cuts despite poor inter-bank liquidity and
rising short-term rates. I am enthralled at what they may do if
policy is genuinely loosened and the credit market truly thaws
out. The persistent error of the macro community since 2009
has been to underestimate the ability of Tier One economies to
loosen monetary policy to avert crisis. The same outcome
seems plausible today in China and equities appear attractive.

Portfolio VaR
Total Risk *

15.0

95% Fat Tail **

1.3

95% Cond VaR **

1.7
* Ex-ante standard deviation ** Based on 1 day time-horizon Monte Carlo simulation.
Source: Independent Risk Management Solutions.

Portfolio VaR History

Return (% NAV)

VaR 95*

6
4
2
0
-2
-4

Source: Independent Risk Management Solutions.

Asset Allocation (% VaR)*

Equity (Net) 65.4%

Prop FX 20.0%

Fixed Income 14.6%

* Aggregate asset class VaR 95/aggregate portfolio VaR 95. Does not account for full effects of diversification.

Current Themes (% VaR)*

EU Beta 27.1%
Low Beta 20.1%
Long USD 20.0%
US 30 Year 14.6%
China 11.1%
Japan 7.1%
* Aggregate strategy VaR 95/aggregate portfolio VaR 95. Does not account for full effects of diversification.

Top 10 Strategies (% VaR)*

Theme

DAX Ftrs

Theme

EU

17.1

Italian Banks RV

EU

9.1

Global FX Deflation

USD

16.2

Japanese Robots

JP

9.0

US 30yr Bond

30Y

12.1

Euro Telcos (Equity)

LB

7.6

Chinese Equity Ftrs

CH

11.7

Tobacco (Equity)

LB

5.2

Euro Pharma (Equity)

LB

11.5

USD vs Commodity FX

USD

0.5

Strategy VaR 95/aggregate portfolio VaR 95. Does not account for full effects of diversification.
Source (all Asset/Theme/Strategy VaR data): EAM. Data as at 27/02/15.

C F Ec l e c ti ca
Ab s o l u te Ma c ro F u n d
NAV

$c

A shares

175.07

113.48

155.65

C shares

179.10

117.11

AUM

160.32
37.4m

Manager Details
Investment Manager
ACD
Administrator

Eclectica Asset Management LLP

Capita Financial Services Ltd
Capita Asset Services Administrators Ltd

Fund Details
Launched
Fund Manager
IMA Sector
Target Return
Share Classes
Structure
Dividends
ISA/PEP Eligible
Prospectus & KIID

31 December 2009
Hugh Hendry
Targeted Absolute Return
Annualised 10% on a rolling 3-year basis
//$
UCITS IV sub fund of CF Eclectica Funds
Accumulated
Yes
www.capitaassetservices.com

Fund Identifiers

A share ()
A share ()
A share ($)
C share ()
C share ()
C share ($)

ISIN
GB00B2PJSV25
GB00B2PJWD21
GB00B39WZQ85
GB00B3B1N814
GB00B3B1NB48
GB00B39WZY69

SEDOL
B2PJSV2
B2PJWD2
B39WZQ8
B3B1N81
B3B1NB4
B39WZY6

Bloomberg
CFEGASA LN
CFEGAEA LN
CFEGADA LN
CFEGCSA LN
CFEGCEA LN
CFEGCDA LN

Fees, Costs & Redemption Structure

Initial Charges
Anti-Dilution Levy
Annual Charges
Performance Fee
Minimum Investment
Dealing
Dealing Line

Up to 5% (class A); up to 1% (class C)

Up to 0.75% on subs/reds over 5% of NAV
1.75% (class A); 1.25% (class C)
None
5,000 (class A); 20m (class C)
(equivalent for and $)
Daily at 12pm
0845 608 0941

Service Providers
Depository
Auditors
Accounts Date

BNY Mellon
Ernst & Young
Financial year-end 31 December

Investor Relations
IR@eclectica-am.com
+44 (0)20 7068 9969

This document is being issued by Eclectica Asset Management LLP ("EAM"), which is authorised and regulated by the Financial Conduct Authority (the FCA"). CF Eclectica Absolute Macro Fund ("the Fund) is a recognised collective
investment scheme in the UK under section 243 of the Financial Services and Markets Act 2000 ("FSMA"). The promotion of the Fund and the distribution of this document however may be restricted by law in other jurisdictions. No
recipient of this document may distribute it to any other person. This communication is directed only at professional clients or eligible counterparties as defined by the Financial Conduct Authority in the United Kingdom. No representation,
warranty or undertaking, express or implied, is given as to the accuracy or completeness of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed by EAM or their
respective directors. This does not exclude or restrict any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any
offer to subscribe or purchase, any securities mentioned herein nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. Recipients of this document who intend to apply for securities
are reminded that any such application may be made solely on the basis of the Full Prospectus and the Key Investor Information Document. Past performance is not a guide to future performance. Values may fall as well as rise and you
may not get back the amount you invested. Income from investments may fluctuate. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. You should obtain professional advice on the
risks of the investment and its tax implications, where appropriate, before proceeding with any investment. All charts are sourced from Eclectica Asset Management LLP unless otherwise stated. Net Asset Values are as at the date of the
document. (c) 2005-15 Eclectica Asset Management LLP; Registration No. OC312442; registered office at 4th Floor, Reading Bridge House, Reading RG1 8LS.
.