Type: Unit trust
Aim: Growth by investing long in equities, short using derivatives and in cash
Minimum investment: Lump sum £500, monthly £50
Investment split: 100% in equities, derivatives and cash
Isa link: Yes
Charges: Initial 5%, annual 1.5%, performance fee 20%
Commission: Initial 3%, renewal 0.5%
Tel: 08457 405 405
BlackRock’s European absolute alpha fund aims to provide positive returns across all market conditions by investing in a portfolio of European equities and equity-related securities, including derivatives.
The investment strategy is made up of four areas – long investing, synthetic-short investing using derivatives, pair trades and cash.
Michael Philips proprietor Michael Both says the idea of a fund which makes money in all conditions and earns more than cash held on deposit in the bad years is so appealing that quite a few managers now offer such funds, but he is not impressed by most of them.
“In almost every case, what they deliver is bucket-loads of disappointment because it is very difficult to achieve in practice. It depends on skill at identifying exceptional stocks coupled with good market timing. Nerves of steel are quite handy too. All fund managers claim to possess these attributes in abundance but few actually do,” he says.
In Both’s view, BlackRock is one of the very few with experience and credibility in running this type of fund. “European absolute alpha qualifies for inclusion within an Isa and has low minimum contributions for both lump sum and regular contributions. “The fund plans to hold between 50 and 100 stock positions which may be of almost any capitalisation. BlackRock’s very similar UK absolute alpha has delivered far in excess of a simple index tracker, but investments made in June 2008 will still be showing losses of around 7 per cent,” he says.
Considering the less attractive features of the fund Both says: “Since this is the BlackRock European absolute alpha fund and the same group offers a UK version, I am not sure that all potential investors would want it to be hedged to sterling. That seems to negate one of its key attractions for investors, namely the diversification into another currency, especially if they already hold the BlackRock UK absolute alpha.”
Both also takes issue with the charges. “The fees are extremely high. They are made up of a fairly typical 1.5 per cent annual management charge plus a 20 per cent performance fee based on out-performance against three-month sterling Libor, with a high water mark.” A high water mark means that the manager will only receive performance fees when the fund’s value is greater than its previous greatest value.
Both thinks that many potential clients will be put off by the high performance fee. He thinks it should be accompanied by a lower fixed annual management charge in the region of 0.5 per cent. “Given past performance, it may still be reasonable value for money compared to an investment held with its competitors,” he says.
Both expresses concerns about the fund’s use of pair trades. This is where a long and a synthetic-short position is taken in two stocks in the same sector. To profit, the manager only needs the long position to outperform the short position, regardless of the direction of the market.
Both says: “The way BlackRock uses pair trading is not a wholly compelling strategy, either in terms of risk reduction or in absolute terms. If you thought a particular sector was strong, why would you sell what you perceive as the weakest stock in the same sector just because you had gone long on the strongest? Logically, you would be better shorting the weakest stock in the weakest sector.”
He also feels that since since only synthetic shorts through contracts for difference or similar derivatives are permitted, liquidity could become a problem in certain market conditions.
“The biggest challenge facing the manager will be in choppy, directionless markets rather than strongly rising or falling ones. The results during the recently precipitous market falls came from short positions but only time will tell whether the manager will spot the turn early enough to avoid being caught out with short positions when the index starts to climb again,” says Both.
Scanning the market for similar funds which may compete with BlackRock, Both suggests CF Ruffer total return or possibly Cazenove European equity absolute return fund. However, he points out that the offshore Cazenove fund has a higher minimum investment of $100,000.
Summing up Both says: “If BlackRock’s European absolute alpha fund can achieve anything like its stable-mate, UK absolute alpha, investors will have reason to be cheerful.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average