This £122m fund sits in the Investment Association (IA) Targeted Absolute Return sector and aims to return between 8 and 10 per cent a year, with low volatility and low correlation to the underlying equity markets. Launched in January 2010, this Dublin-domiciled Oeic is co-managed by Mark Swain, Rupert Fleming and Mark Boucher.
Mr Swain explains the fund is a UK equity long/short strategy with low net exposure, and although the team has employed the same strategy throughout, “we aim to learn and evolve and change with markets”. He adds: “We’ve grown up and become better at what we do; the best way to look at it is the risk-return measure. The returns have probably come down in the past few years, partly as a function of the environment we’re in, but the volatility has fallen markedly as well.”
Mr Swain notes this is a result of improving the risk management of the vehicle, including “cutting positions early when they’re not working and getting the balance of the portfolio right, so that the correlation with the underlying equity market is nice and low”.
While risk management has been one evolution, he points out the low growth environment is another factor that has affected the fund’s strategy. “In a higher growth environment we’d target 10-12 per cent a year, but in the current market it’s a bit tougher.”
Mr Swain adds: “Between 1998 and 2008 the fund had an annualised track record of almost 10 per cent. We are [now] in a slightly different world and it is unrealistic to target those sort of returns in this kind of environment. We think 8-10 per cent is achievable, but it is getting pretty hard. These targets are based on what we’ve achieved in the past and we can demonstrate they’re achievable.”
The team’s focus is “on the individual stocks and the fundamentals”, but the manager acknowledges it needs to be aware of the broader economic backdrop as this has implications for all the companies the fund invests in.
| EXPERT VIEW - Jake Moeller, head of UK and Ireland research, Thomson Reuters Lipper |
Verdict: This is another strong offering in the mixed bag that constitutes the IA Targeted Absolute Return sector. A genuine low-correlation product with less than half the volatility of the UK share market, it has struggled on some of its shorts in a difficult market in 2016, but has a robust longer-term track record. The return of Mark Boucher has seen some enhancements to the fund’s risk processes, including a reduction of exposure to smaller-cap stocks and new stop-loss provisions. |
The fund’s A-share class sits at a risk-reward level of four out of seven, with ongoing charges of 1.53 per cent, as well as a performance fee of “10 per cent a year of any returns the fund achieves above its high watermark”, its key investor information document shows.
For the five years to June 16 the fund’s C share class has returned 23.6 per cent compared with the 30.8 per cent rise in the FTSE All-Share index and the much lower IA Targeted Absolute Return sector average of 12.2 per cent. However, the vehicle has outperformed its benchmark across one-, three- and 10-year periods, data from FE Analytics shows.
As an actively managed portfolio, Mr Swain points out there are always changes, but recent moves include reducing shorts on UK industrial stocks and decreasing the long exposure to the UK consumer. He says: “We were early on to shorting UK industrial stocks with exposure to the oil and gas market. The oil price, which everyone looks at very closely, started falling and the most obvious names highly correlated to the oil price fell with it. [There were] the UK engineering stocks, which were perceived to be of much higher quality, but had a lot of benefit from a $100 [a barrel per day] oil price. We were shorting those, which worked well. We’ve recently been removing those shorts as the oil price found a base [and] rallied to $50. It’s not an area we wanted to be short any more.”
In terms of reducing the long exposure to the UK consumer – a theme the team had played through the travel and leisure sector – the manager cites a reduction in disposable income among UK consumers and the cloud of the EU referendum vote as key drivers behind the move.
The manager points to May as a good month for performance where the portfolio added alpha outside of the resources and “Brexit-type” areas, which “proves we can make attractive returns without taking a gamble on these events”. He acknowledges that the first quarter of 2016 was trickier, not only with a few stock-specific issues but also “the huge rotation in the market”.
The first three months saw a change where stocks with high earnings growth that had received upgrades started derating and stocks that had been downgraded consistently were perceived to have reached a base, illustrated by the rally in the mining stocks.
