This $4.6bn (£3bn) fund from Old Mutual has been run by experienced managers Ian Heslop, Amadeo Alentorn and Mike Servent since launch in June 2009. Mr Alentorn explains the aim of the vehicle is to deliver absolute returns across rolling 12-month periods.
“Absolute returns for us mean positive returns, irrespective of whether equity markets are up or down,” he says. The manager emphasises the objective becomes particularly important for clients during market corrections, as seen this summer.
“We cover 3,500 [global] stocks, out of [which] we build a portfolio consisting of around 800 companies; that is, about 400 long – stocks that we like – and 400 short – those that we don’t like,” Mr Alentorn says of the selection process. “So for every £100 of a client’s investment, the portfolio is £100 long and £100 short at the same time. It’s a very careful construction process to ensure we don’t take any market direction – effectively, any exposure to beta.”
It’s a “systematic” process, which means the team tries not to overreact to the markets. The fund’s risk rating reflects this, sitting firmly in the middle of the risk-reward scale at level four, its key investor information document shows. An ongoing charge of 0.84 per cent applies to the clean fee I-retail share class in US dollars.
The manager continues: “As part of our investment process, we monitor or measure the market environment in each of the four big regions we split the world into – North America, Europe, Japan and Asia. We monitor what is the aggregate market environment and investor risk appetite in each of those regions, and the portfolio positions itself towards styles and sectors that are most likely to do well in the current environment.”
Mr Alentorn explains how the fund adjusted itself earlier in the year. “In May/June it started to rotate towards defensive styles, which are based on strong balance sheets or companies that are financially strong, and therefore the portfolio would be long those firms and short those that have weak balance sheets. We feel it’s a much more straightforward way of rotating the portfolio to go directly to the markets and ask, how are the markets right now? And when we start to see there are changes, the portfolio will start to rotate as it did at the beginning of the summer.”
On a sector basis, the portfolio was long healthcare and short some of the more cyclical sectors during the summer.
The manager notes: “Analysing returns since the fund’s inception, [they are] in the region of 6-7 per cent net. What we’ve experienced in the past 12 months has been pretty much in line with the history of the fund and with clients’ expectations, so we’re pleased with this.”
Data from FE Analytics reveals the fund has outperformed the Investment Association Targeted Absolute Return sector average across one, three and five years. The vehicle has returned 47.9 per cent in the five years to October 28, compared with the 15.4 per cent average generated by its peer group. It has also delivered a solid 4.5 per cent in the past 12 months, just slightly ahead of the sector’s 3.8 per cent average return.
“More recently it has [come from] the defensive positioning,” Mr Alentorn reveals. “[In] the last quarter of 2014 – again a period where the fund was positioned very defensively and was short energy – it was able to profit from the weakness in the price of oil and oil-related firms.
“The defensive positioning at the end of last year deducted a bit of performance, and around the February/March [2015] period when there was a temporary jump in risk appetite. We expect these short-term fluctuations in performance, but as long as we’re correctly positioned for the more medium-term cycles, then we know we can work to deliver the objective.”
Why does Mr Alentorn think investors have been allocating to absolute return funds during recent volatility? “A lot of clients look at our fund as a fixed income replacement-type strategy, where they’re saying we’re not comfortable with the risks we’re taking with fixed income but we’re still looking for high risk-adjusted returns that are not correlated with equities,” he says.
EXPERT VIEW
Martin Bamford, chartered financial planner, Informed Choice
This fund has delivered steady absolute returns against the backdrop of global equity market volatility in the past year. It is managed by well-resourced and experienced team, whose members clearly work well together and have a tight focus on managing equity strategies. The fund has a sensible target of 5-6 per cent annualised volatility, aiming for an annualised return of cash plus 6 per cent, which it has the potential to deliver in the longer term. It has grown quickly in the past six years, attracting significant assets, which should not cause many concerns about capacity constraints given the global nature of the stock selection. As an Irish domiciled-fund with a US dollar base currency, this fund might not appeal to UK resident retail investors.
