Focus: Following the hot money

Tom Becket, head of global investment strategy at PSigma Investment Management, warns investors to be on guard when there is a rash of fund launches in a particular area.

“Schroders launched an agricultural fund, which invested mainly in grain and livestock futures, in 2006. It shot up 60 per cent in about eight months, and we took profits just as other groups were starting to launch products in this area.

“Meanwhile, the best-performing fund of 2008 was Hugh Sergeant’s River & Mercantile UK Long-Term Equity Recovery portfolio, which we started buying into last November. I wouldn’t be surprised if, on the back of that, we were to see a bunch of recovery funds popping up."

Another sector that has bloomed this spring is Absolute Return. In the long/short equity space, BlackRock’s UK Absolute Alpha fund had almost no rivals for its first three years.

Tony Stenning, head of UK retail at BlackRock, says he was surprised it attracted so little competition, as Ucits III powers, which allowed retail funds to short poorly performing stocks and thus make money regardless of the direction of the stock market, were introduced back in 2002.

It was only when markets, which had been rising fairly constantly since 2003, began to buckle that the industry embraced these tools. From only a handful of absolute return funds in 2006, there are more than 22 today.

Some IFAs argue that, unlike funds designed to invest in a 'new-frontier' market or esoteric concept, there is a valid case for absolute return products, given the UK economy is on course to shrink by 3.5 per cent this year.

But the returns last year from this group have not dazzled. While they performed better than the markets in which they invested, some still lost money, contrary to their stated objective.

The key, insists Peter McGahan, managing director at IFA Worldwide Financial Planning, is to understand what risks investors are taking relative to rewards and get comfortable with the fund manager’s experience of the relevant investment technique.

“We do qualitative and quantitative research before investing in a fund," he says. "If it doesn’t have a five-year track record, we’ll inform our clients of the extra risk involved. Marketing brochures usually get filed away in the bin."

Alison Swersky is a freelance journalist