Aim: Growth by investing long and short in European equities including the UK and in equity related derivatives
Minimum investment: Lump sum £1,000
Investment split: 100% long and short in European equities including the UK and equity related derivatives
Isa link: Yes
Charges: Initial 5%, annual 1.5%, performance fee 20%
Commission: Initial 3%, renewal 0.5%
Tel: 0800 212433
Gartmore has made its absolute return investment process available to retail investors with the creation of its European absolute return fund.
Arch Financial Planning managing director Arthur Childs believes investors will incresingly turn to absolute return funds for comfort if European markets are going to be moving sideways, with some rather exaggerated peeks and troughs along the way. “Long only funds can make money in such markets but a good long/short strategy has more opportunity to do so,” he says.
Childs notes that the Gartmore European absolute return fund took in excess of £30m in its first two weeks of trading. “This seems to show that interest is already strong and is only likely to increase,” he says.
Fund managers Roger Guy and Guillaume Rambourg together manage over £4bn of European equities including the flagship Gartmore European Selected Opportunities fund. The new fund is the first retail long/short fund from Gartmore, but Childs says it has been running absolute return style portfolios for institutional and professional investors for over nine years. It used the skills of Guy and Rambourg for the whole of that period.
“These are very much stockpicking managers. They look for companies whose earnings will surprise on the upside and others which will surprise on the downside. This process has paid off, as they have achieved an average return of 1.11 per cent a per month for their institutional investors over the last nine years,” says Childs. He adds that it is unusual to have two fund managers who have been working in the same sector together with the same company for the past 10 years.
The fund can invest entirely into cash and money market instruments and will use a similar strategy to Gartmore’s Alphagen Capella fund which was not available to retail investors.
“Long positions will use a combination of direct investment and derivatives, while short positions will use derivatives, mainly swaps and futures. The fund will typically have 50 to 100 stocks depending on market conditions, and is sterling based,” says Childs.
He explains that the 20 per cent performance fee is payable when the fund exceeds the previous day’s net asset value, subject to being above the level at which the last performance fee was paid. “The estimated first year total expense ratio is expected to be about 1.77 per cent, excluding performance fee. The commission is 3 per cent initial plus 0.5 per cent renewal.”
Turning to the potential drawbacks of the fund, Child says: “I am not convinced of the argument for performance fees simply because a fund is using hedging techniques. I am not sure that Gartmore has really thought this through at a time when investment returns are low and costs are under scrutiny. Numbers of good quality IFAs and financial planners are moving to passive strategies for their clients.”
Childs says he has watched the video on Gartmore’s website where Rambourg explains how the fund is managed. He says the people and the processes are the same, whether the managers are looking for companies they believe will outperform on the upside or the downside.
“I am not sure why this requires a performance fee more than any long-only fund. Taking a fifth of the positive return on the fund is a huge drag on overall performance. The argument is no doubt that this team will more than make up for the performance fee, but in pushing the bar up in this way, it makes the chances of disappointment greater,” he says.
Identifying potential competitors, Childs says: “I would imagine the first name on most IFA lists of absolute return funds would be the BlackRock UK absolute alpha fund. This has been a steady performer with Mark Lyttleton at the helm for four years. It is also difficult not to be impressed by the Octopus Partner absolute return fund managed by Richard Power and David Crawford, which has gained 30 per cent growth in its first year. The European focus of the Gartmore fund sets it apart.
“Sadly this is not a sector that has generally yet managed to achieve the absolute returns promised, but we must forgive managers for this in view of the unprecedented markets over the last year.”
Summing up, Childs says: “Gartmore has reinvented itself over the last 10 years to become a specialist provider of long-only and alternative products. This is the sign of a healthy company. Its experience in managing this type of strategy should put this fund well on the radar for IFAs seeking to use absolute return funds for their clients.”
He concludes that one note of caution is to be wary of moving clients into funds which are designed to perform well in bear market conditions, then find that the market experiences some exceptional, although short lived, bull runs over the coming year or two. “The Gartmore fund is run in such a way that it does not have to be inhibited in a fast rising market.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good