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Cashflow is king for Liontrust


European Absolute Return Fund

Type: Unit trust

Aim: Growth by investing long in European equities and short in equity-related securities including derivatives

Minimum investment: Lump sum £1,000

Investment split: 100% long in European equities and short in equity-related securities including derivatives

Isa link: Yes

Charges: Initial 5%, annual 1.5%, performance fee 20%

Commission: Initial 3%, renewal 0.5%


Liontrust’s European absolute return fund is designed to produce positive returns in all market conditions by investing long in equities and using derivatives to create short positions.

It will use Liontrust’s cashflow solution investment process which starts from the basis that profit forecasts which are used to value future profits, can be unreliable. This provides investment opportunities through an analysis of cash flow.

Looking at how the product could be useful to IFAs, Hargreaves Lansdown senior analyst Meera Patel says: “Investors who are concerned that markets are likely to stay volatile for some time and even fall from current levels may find absolute return funds appealing. They could form the core element of a portfolio as they target positive returns in all market conditions.”

Patel notes that this fund aims to outperform the three-month Libor each year. “While Libor rates are currently low, I would expect the target to rise as the Libor increases over time and interest rates increase,” she says.
One of the attractions of this fund in Patel’s view is that the managers have a great track record in running a hedge fund and have been using the shorting technique with some success for a while. She thinks this experience in shorting puts them on a good footing to manage the new fund.

“The investment strategy is also tried and tested. It is based around cashflows and the mistakes people make when forecasting company profits. There a behavioural element to the process,” she says.

Patel also points out that the team has recently been beefed up with additional resources, which she believes should be useful in terms of idea generation over time.

Discussing the less attractive features of the fund, Patel says: “Generally speaking, we are not huge fans of performance fees. This fund has an annual management charge of 1.5 per cent and a 20 per cent performance fee on outperformance of the three-month sterling Libor, with a high watermark. “
Patel says that one of the problems with performance fees is the benchmark used to calculate the fee. “We can argue that any active fund manager should be able to deliver positive returns in the longer term, so performance fees can make these funds expensive.”

“Investors also need to appreciate that while absolute return funds may outperform in a falling market, they may get left behind in a rally because of their shorting capability. However, as long as the fund delivers what it says on the tin, investors should be satisfied with the returns.”

Discussing the main competitors, Patel suggests BlackRock European absolute alpha, Gartmore European absolute return and Ignis Argonaut European absolute return funds.

Summing up, Patel says: “Given the flexibility of Ucits III, these funds can have different exposures to the equity market at any one given time and so the performance and the underlying portfolios could vary considerably. It is worth doing some homework to check which funds are more suitable for investors.”

Patel says that shorting stocks requires a particular skill and can potentially go horribly wrong. “Going long on a stock and getting it wrong means that the most you can lose is 100 per cent. Getting a short wrong on the other hand could potentially lead to infinite losses. If the long ideas and short ideas go wrong, there could be a double whammy in performance and investors should be made fully aware of the risks.”


Suitability to market: Good
Investment strategy: Good
Charges: Poor
Adviser remuneration: Average

Overall 8/10


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