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Adviser Fund Index – Super powers

The increasing desire for investment choices outside traditional asset classes to protect against falls in the market has put investor focus on alternatives.

It has also highlighted the possible advantages offered by Ucits III, particularly the use of shorting to hedge the risk of holding a long position in an uncertain environment.

However, the use of Ucits III powers is a feature that is likely to endure long after the credit crisis has abated, says Ben Willis, head of research at Whitechurch Securities and Adviser Fund Index panellist.

Using Ucits III powers enabled the BlackRock absolute alpha fund to produce consistently positive results for every month in 2007, despite the fallout from the sub-prime crisis. The success of the fund, along with others which use Ucits III, such as the JP Morgan cautious total return fund, has provided sufficient evidence to lure investors.

Willis says: “I think that Ucits III will become increasingly a mainstay of the fund industry. Using these powers can provide defensive possibilities but what you need is people with track records.”

James Davies, investment research manager at Chartwell and a fellow AFI panel- list, goes even further, claiming that the new powers may fundamentally change traditional ways of managing investment.

Davies says: “In my view, in a couple of years, the kinds of funds that will be available will not be long-only. All funds will have moved to a position where they can use the powers granted by Ucits III.”

Hargreaves Lansdown head of research Mark Dampier says it is impossible to lump together those managers who use Ucits III powers since they can engage them in a broad variety of ways.

However, he says funds such as BlackRock absolute alpha, that have used them successfully, will have a sig- nificant effect. “Traditional funds such as cautious managed funds will start losing out,” he says.

Dampier disagrees with Davies, however, that the advent of Ucits III means there is no longer a need for long-only investment vehicles. He says: “I do not think that there will be a huge shift towards funds which use these powers. Absolute return funds tend not to do so well in bull markets and so there will certainly be a place for long-only funds in the future.”

Few of the funds which use Ucits III powers have been around long enough to have been tested against a variety of market conditions.

It is also difficult to dis- tinguish between short- term popularity of funds that offer defensive possibilities during challenging times in global markets and longer-term trends in investor sentiment.

Willis says: “Whether this is long term or not is debatable. Successful funds have been highlighted recently because of negative sentiment but I suspect that they will continue to be utilised whenever we get heightened volatility.”


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