This £583.6m fund was launched in June 2009 with Alex Veroude at the helm.
Mr Veroude, who remains sole manager of the fund, says the investment objective is to provide attractive, positive absolute returns in all market conditions on a rolling 12-month basis.
He adds: “In addition, we aim for at least three-month London Interbank Bid Rate (Libid) plus 5 per cent on a rolling annualised five-year basis, gross of fees and expenses.”
On a risk and reward profile, the fund is placed at level three, where the highest level is seven, and ongoing charges are 1.70 per cent, according to Insight Investment.
The manager says: “We aim to generate returns from across the credit spectrum, targeting a large proportion of returns from alpha rather than being reliant on market returns.”
According to Mr Veroude, the fund’s broad investment universe encompasses investment grade and high yield corporate debt, structured credit, such as asset-backed securities, loans and cash instruments, plus a wide range of derivatives, including credit default swaps on single names and indices, interest rate and inflation swaps, futures, forwards and options.
He adds: “The investment rationale is primarily to identify idiosyncratic credit opportunities and exploit pricing anomalies in the market. The fund can also take long or short directional views.”
Mr Veroude has a range of strategies at his disposal for use in the portfolio, including carry, momentum (long or short credit), special situations (distressed), capital and market structure arbitrage, tactical macro and basis trades, as well as risk hedging techniques.
While he takes macroeconomic factors into account when analysing and valuing different segments of the market and specific instruments, he confirms that these do not alter the overall investment process.
He notes: “The most meaningful change made to the portfolio in recent times was the addition of equity put options to hedge short-term downside risk in late 2013. We have rolled these positions over and continue to maintain them today.
“We believe that any material correction in credit markets is likely to coincide with a correction in equity markets, so these positions are an efficient and effective way to incorporate downside protection.”
The portfolio sits in the newly created IMA Targeted Absolute Return sector. In the five years to September 3, it has racked up an 88.83 per cent return, against the sector average of just 17.7 per cent, according to FE Analytics.
Over a three-year timescale, the fund has returned a slightly more modest 23.96 per cent to investors, compared to 11.24 per cent from the sector.
Mr Veroude believes the portfolio has “comfortably” achieved its performance target.
“Since launch, all the primary segments of the fund’s holdings have contributed positively to performance overall. In terms of market timing, we have held an overall long bias towards credit over much of the fund’s life, which has been positive for performance,” he observes.
“In terms of deciding between markets within credit, the allocation to ABS (asset-back securities) has performed well for much of the fund’s life. Security selection within the ABS, high-yield and investment-grade markets has also contributed substantially.”
There have been some detractors from performance since the portfolio’s inception in 2009, however, as the manager explains. “Some of our short positions, held via long positions in credit default swap indices, have detracted slightly from performance at different times. This is to be expected when you have implemented measures to reduce downside risk,” he suggests.
As for the remainder of the year, Mr Veroude comments: “We remain happy with the fund’s positioning, but recent market volatility may lead us to add some index protection via positions in the iTraxx Crossover credit default swap index.”
EXPERT VIEW
Martin Bamford, chartered financial planner and managing director, Informed choice
Verdict
This fund has strongly outperformed the mediocre IMA Targeted Absolute Return sector. It has over £500m in net assets, which is a decent size for a fund, and the ongoing charges of 1.70 per cent don’t look too expensive for an absolute return fund, in spite of the 10 per cent performance fee. The fund is currently shorting government debt and is long on high yield asset-backed securities, which is the position you might expect to see at this stage of the economic cycle. I would struggle to incorporate an absolute return fund into a wider portfolio, but it is good to see these funds becoming well established and doing what they set out to achieve.
