Tosca ‘closes’ Opportunity, Mid-Cap funds to protect performance

May 09, 2014  

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UK activist fund manager Martin Hughes’ Toscafund Asset Management group is closing its award-winning Tosca Opportunity fund – and its sister fund Tosca Mid-Cap – to new investor inflows with effect from 2 June in a move that the firm describes as underlining its focus on performance rather than asset-gathering.

In an explanatory newsletter sent out to investors this week, portfolio manager Hughes made clear that the expected future performance of the fund’s net asset value per share takes priority over the size of the funds managed. "This is a clear demonstration of the commitment to alignment of interests and has been warmly received by existing investors," said Toscafund in a statement.

Tosca Opportunity adopts a private equity-style approach in terms of the fund’s investment time horizon and targeted returns, investing in publicly listed equities. The manager anticipates that the fund’s core holdings, many of which have already been held for at least four years, will take up to a further two years to reach fair valuations or exits. "It is therefore envisaged that the funds will remain closed to inflows for at least two years," Toscafund said.

In the April month-end newsletter, Hughes said: "In being by far the largest shareholder, the PM is unashamedly protecting his own interests in setting out to maximise the upward movement of the net asset value, rather than allow asset gathering to dilute the returns of current investments, some of which now approach the reasonable investment limit."

He added: "I hope the shareholders agree that this is an unequivocally positive situation for all shareholders. Known inflows and capacity agreed puts the fund in a comfortably invested position. As such, stemming the inflows beyond known commitments after 2nd June would be in the interests of all current shareholders."

In a separate statement, Hughes – the CEO of Toscafund, commented: "I understand that closing a well performing, multi-award winning fund to inflows may not be common practice in an industry where AUM is often an objective that is set ahead of performance. My personal objective is for the future annualised returns to continue to outperform and at least match the past."

He added: "Since inception in 2005, Tosca Opportunity has delivered an annualised return of 14.4% net, which compares with just 4% for the MSCI World Index. I look forward to working with the management and directors of our holdings to set out the best path to a fair equity valuation for each position."

London-based Toscafund was founded in 2000 by Hughes, who was previously chairman of Tiger Management Europe Limited. The firm manages a range of equity funds specialising in global financials and UK mid-cap activism – as well as other more opportunistic strategies targeting areas including UK mortgages and UK commercial property. Toscafund currently manages around $3 billion of assets and employs 33 people.

The firm enjoyed an outstanding performance in 2013 across its range of equity-focused hedge funds – with both Tosca Opportunity and Tosca Mid-Cap winning EuroHedge awards in January for their performances the previous year.

Tosca Opportunity won the award for Event-Driven & Distressed funds with a stellar return in 2013 of 56.14% - on an annualised Sharpe ratio of 3.77 – while Tosca Mid-Cap won the Specialist Equity category for a second year in succession with a return of 44.42% in 2013 and a very high Sharpe ratio of 7.39.

However, this year’s more unsettled equity market conditions have made for a much more challenging environment. Tosca Mid-Cap is down by over 6% so far this year after losing more than 8% in April – while the $500 million Tosca Opportunity fund is also down for the year to the tune of -3.45% through April, having lost 6.42% in the April stockmarket rout.

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