Fund Review: Old Mutual Global Equity Absolute Return fund

The team specifically targets an annualised volatility of 5-6 per cent, for an expected annualised return of cash plus 6 per cent, by investing in a very wide selection of short and long stock positions. The make-up of these plays should have a low correlation with equity and bond markets.

Given that the portfolio consists of a substantial 852 holdings – around 157 more than it did 12 months ago – Mr Heslop admits he is often questioned in regards to his conviction. But he is unapologetic about the level of plays, asserting that no individual stock should be able to have a significant impact on performance.

The fund currently runs 418 long positions – which should benefit the portfolio if these stocks rise – against 434 short trades, where the team is looking for the shares to drop in value. He says the construction of the fund is ultimately based on the system they employ. “I want to build a market-neutral portfolio and we do this through our return forecasting system, which is designed to squeeze out any correlation,” he explains. “This way we can be confident in the holdings. We do not target the number of positions as our strategy is not about building a concentrated fund.”

Mr Heslop adds that the fund carries a number of styles, which it can “tilt in and out of depending on the environment”. Such styles consist of looking at valuations and growth potential and the inclusion of any stock is the result of a plethora of research, he explains.

The vehicle was launched six years ago, in July 2009, and the manager says the investment strategy is constantly evolving, chiefly by improving the system that helps the team select stocks. “We have an extensive research process both internally and through external partners, which is constantly pushing the investment process forward,” he notes.

Macroeconomic views sit very much in the background of the team’s strategy. Like any fund manager Mr Heslop has his views, but he says they do not have an impact on the portfolio. “We are interested in what markets are doing. We are not making big macro calls and we have no big currency or country positions,” he says.

Recent moves made by the management team have been partly on the back of the European Central Bank’s decision to introduce a large-scale quantitative easing programme, and the subsequent boost in investor sentiment the move ushered in. The fund began rotating to a more neutral stance in respect of investor risk appetite in February, from being more defensively placed at the start of the year. “Sector positions have also rotated to reflect the new mood, with the long position in utilities moving to short, and the short positions held in energy companies moving to long,” he explains.

The fund sits firmly in the middle of the risk-reward scale, at level four out of seven, and has an ongoing charge of 1.76 per cent on the A-hedged accumulation clean retail share class.

Since launch to June 15, the portfolio has delivered a total return of 42 per cent versus the IA Targeted Absolute Return peer group average of 26 per cent, data from FE Analytics shows. The vehicle is up 24 per cent across three years, but year to date its strong performance has tailed off by 2 per cent, which Mr Heslop describes as “disappointing”.

However, while the fund’s long plays in the healthcare sector and short plays in energy in the past 12 months have proved to be a boon for the portfolio, he says that during the early part of this year it was hit and lost money partly on the back of its long utilities positioning.

“There have been a couple of months where the environment has been unstable,” he says. “But we are comfortable we will achieve our targets in the second half of the year.”

Looking ahead, the manager does not believe volatility can remain as low as it has been, especially with the prolonged period of ultra-low interest rates appearing to be entering its final days.

“I am still constructive on equity markets, but there are still political events to come which should cause some short-term volatility,” he adds.

EXPERT VIEW

Jake Moeller, head of Lipper UK and Ireland research, Lipper

Ian Heslop and his colleagues are very bright sparks. Eliminating benchmark risk is a quant heavy business and it’s reassuring to know this process has been successfully implemented in other Old Mutual strategies. The fund has achieved its objectives and scores the maximum Lipper preservation rating of five (across five years). This confirms a good pedigree for the risk-averse investor. For those investors happy with a performance fee and the opportunity cost of buoyant, long-only exposure, this fund is credible.