The fund focuses on companies with a market capitalization of less than £1bn. These will be undervalued because they are either misunderstood, poorly researched, out of favour or affected by a merger or an acquisition. However, the fund will only invest in them if there is a positive catalyst for a change in its fortunes.
Fund manager David Crawford has 10 years investment experience and joined Octopus in 2006 He previously worked at Hermes Investment Management and M&G Investments.
Crawford will invest a big portion of the fund in smaller companies, including those on the alternative investment market, but the emphasis will be on companies with a market capitalisation of more than £100m.
The fund is targeting an absolute return regardless of stock market movements, so it is benchmarked against the 12-month sterling Libor rather than an index. The synthetic short positions enable the fund to benefit from share price falls, which in turn provide the potential for positive returns in all market conditions.
Octopus says it launched the fund for investors who are cautious about investing in the stock market and who want to be protected from a potentially deteriorating economic environment. It says it decided to measure performance against the real alternative for investors, which is leaving their money in the bank.
The fund’s short positions have made a major contribution to performance so far, and Crawford is convinced that staying short has been the right strategy. With the UK economy deteriorating, many companies are looking vulnerable to earning downgrades, and when this is combined with high financial gearing, some share prices could fall further.
Despite the obvious advantages of giving the fund manager the tools to potentially benefit from share price falls some investors may be wary of a strategy they may not understand.
The fund is also more dependent on the manager’s skill than a long-only portfolio. Due to the nature of the shorting process, any mistakes Crawford makes on the short side will hurt the fund more than holding a poor performer on the long side.