Aim: Income and growth by investing long and short in bonds, bond market derivatives and money market instruments
Minimum investment: Lump sum 2,000
Investment split: 100% in bonds, bond market derivatives and money market instruments
Isa link: Yes
Pep transfers: Yes
Charges: Annual 1.25%
Commission: Renewal 0.4%
Tel: 0800 0684000
Threadneedles absolute return bond fund is an Oeic that invests in bonds, bond market derivatives and money market instruments under the Ucits III directive.
Charter Devon Law principal Michael Posner regards this fund as an interesting new offering which seeks to give investors the opportunity to diversify their holdings in traditional bond portfolios.. The recent change in the regulations for Ucits will probably lead to a proliferation in this type of fund being offered, with the use of derivatives to manage returns becoming much more the province of main-stream retail funds rather than just hedge funds, he says.
Posner notes the fund is benchmarked against cash rather than against an index or a peer group. It aims to preserve capital and give consistent positive returns, irrespective of the state of the markets.. The fund has a target return of 60 per cent above three month Libor, which would mean at the present time, with Libor standing at 4.5 per cent, that the target will be a gross return of 7.2 per cent. This nets down to 5.75 per cent after charges but before deduction of tax, says Posner.
He points out that it can be held within an Isa wrappers and self-invested personal pension. He feels it will attract the attention of investors as part of a diversified portfolio of holdings,. The benchmark of 160 per cent of Libor will, of course, fluctuate with movements in interest rates, although the exposure of the fund is to global bond markets., he says.
Posner highlights Threadneedles contention that, while this fund does have some constrictions because it is a retail investment fund, the fixed income teams experience in managing similar investments places it ahead of the market. Having some $1.6 billion under management in hedge funds, it strengthens Threadneedles ability to control risk in this retail offering. While it is of course stressed that this is not a hedge fund, it is Threadneedles statement that its success in managing risk places this offering, with a relatively conservative benchmark target, in the lower risk category of investments, he says.
Examining the product in more detail Posner says: The fund has no initial charge and has an annual management charge of 1.25 per cent, from which a trail commission of 0.4 per cent is payable in respect of class 1 shares, which accepts a minimum investment of 2,000. Class 2 shares require a minimum investment of 500,000, but attract an annual charge of 0.65 per cent. Threadneedle offers the ability to both withdraw the income generated and also to re-invest the income to grow the fund value, he says.
Casting an eye over the product literature Posner says: Given that the subject is a relatively complex one, and new to the market in this form, Threadneedle makes an admirable job of explaining the product in its literature, with a wealth of legible and understandable detail. The fund offers a diversification from equity or bond holdings and is increasingly likely to form part of a balanced portfolio of holdings..
Moving on to the potential drawbacks of the fund Posner says: I do not consider that there are many elements to dislike about the product itself. There has been an increasing use of derivatives over the recent past, and provided the checks and balances are in place to ensure that risk is properly managed, it is likely that there will be an increasing popularity for their use in retail investments.
However, Posner states that while advisers are assured that Threadneedles team have the specialist skills to manage the investment risk and have been doing so for years, the proof will be the opportunity for investors to develop the degree in hindsight that follows from the launch of any new type of product. I told you so will be the cry in due course, whatever the outcome, and I suspect the popularity of this new offering will depend entirely on whether you do or do not trust Threadneedle to get it right. I suspect we all hope it does, says Posner.
Looking at the funds which are likely to provide the main competition Posner says: This is a new product area, with UBS and Merrill Lynch having already launched their equivalent funds this year, and others developing their offerings as well. However, Threadneedle is offering a conservative approach, with safety as a driving factor, so it will largely depend on a clients risk profile as to whether or not the fund is attractive to them as an additional investment tool.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average