Fund Review: Henderson UK Absolute Return fund

The portfolio is co-managed by Luke Newman and Ben Wallace and consists of 104 long positions, which benefit when a company’s stock rises, versus 25 short trades, which should profit if these shares fall.

Fundamentally, the process is “very much bottom-up driven”, Mr Newman explains. “The portfolio has twin aims: to deliver an absolute return to our investors regardless of market conditions and to do this on a consistent basis.” But he adds that the stock-selection process has a very clear split. “We have our core book, which consists of our longer-term investment views from both a long and short trading perspective. Then there is our tactical trading book, which helps us to make more money during periods of volatility,” he says.

The Henderson open-ended investment company was launched in April 2009 as a replication of the asset manager’s Cayman Islands version, which has been going since 2004, and the management team behind the new vehicle has stuck to the process of the earlier incarnation. “Our aims do not change in a downward or volatile market,” the manager notes. “The strategy remains as comfortable operating in falling/flat equity markets as it does in positive ones. Net exposure has operated between -30 per cent to 70 per cent across the past 11 years and will not alter our return expectations for the fund.”

While Mr Newman operates in a macroeconomic vacuum, he says that naturally he has to pay attention to macro risk when it rears its head, while periods of macro uncertainty can potentially provide good investment opportunities.

A key theme playing across the fund’s core book is dividend growth, which the manager notes is well represented in UK insurers and housebuilders. “In a low [interest] rate world, income provision and dividend growth have become ever more valuable,” he says. Another area piquing his interest is challenger banks, such as Virgin Money and Aldermore. “These are smaller companies taking market share from the incumbent banks,” he adds.

The ongoing charge on the I-accumulation clean fee retail share class is at 1.06 per cent, while the fund is placed at level four on a risk-reward profile.

Since launch to June 15 the portfolio has delivered a strong total return of 47 per cent versus the IA Targeted Absolute Return peer group average of 28 per cent, data from FE Analytics shows. In the past three years, the fund has achieved 33 per cent against the sector average of 15 per cent.

Looking at the portfolio’s positive returns Mr Newman asserts that he and his co-manager tend not to have large holdings, which can detract from performance. Part of their process is using a stop-loss mechanism, where the position is recalibrated if stocks – either on the long or short side – move by 10 per cent. “This is a strict discipline as we cannot tolerate large capital losses with a fund like this,” he adds.

In May, trading activity in the fund was dominated by the UK general election. The manager says the combination of the primary election-sensitive sectors, such as banks and utilities, were increasingly pricing in the full extent of the proposed Labour manifesto.

He explains: “Some late indications that support for the incumbent government was stronger than indicated in the polls, particularly through money flows in betting markets, led to the decision to cover many of our tactical shorts in the 48 hours prior to the election day. In many cases, we successfully initiated trading long in many of these same companies.”

Turning to the upcoming referendum in 2017 on the UK’s membership of the European Union, Mr Newman notes the current indications are that it is unlikely to result in an exit. But he says it will “create uncertainty and delay investment decisions both domestically and from overseas companies until the issue is resolved”.

Overall, he describes the current environment as “a golden period for equity long and short”.

EXPERT VIEW

Jake Moeller, head of UK and Ireland research, Lipper

I have always rated this former Gartmore franchise highly and it is a successful integration story for Henderson. The fund has met objectives and scores the maximum Lipper preservation rating of five (across five years). The fund’s emphasis on short-term trading requires a particular skill, being careful not to become a forced seller in crowded trades. Ben Wallace and Luke Newman have excellent credentials but exhibited a period in 2011 when the process appeared to have misfired. Note the performance fee and appreciate the potential sacrifice of the reduction in volatility.