Gartmore describes absolute return investing as aiming for positive returns regardless of market conditions by balancing traditional equity investment with derivatives. Under the Ucits III rules, fund managers can use derivatives to create short positions. This technique is known as synthetic shorting and provides the potential to make money in falling markets.
Synthetic shorts involve opening a contract with another party, to create the short position. The parties agree to pay each other profits or losses as the share price rises and falls and this is known as a contract for difference, or equity swap. These contracts allow managers to profit from the price of an asset going up or down without buying or selling the asset.
The Gartmore Japan absolute return fund will combine conventional long investing with synthetic shorting to produce positive returns regardless of market conditions. It can invest in companies of all sizes and may also invest all or a substantial part of its assets in cash, near cash, deposits and money market instruments.
The firm’s head of Japanese equities John Stewart manages the fund. Stewart joined Gartmore’s Tokyo office in 1995 and has spent the last 10 years as head of Japanese equities. He has managed hedge funds for Gartmore since 2000 and previously worked for Prudential Portfolio Managers as a Japanese equity fund manager.
Stewart will look at longer term strategic positions and short-term tactical positions. The strategic part of the portfolio looks for firms that the manger expects to deliver better earnings than expected by the market. The tactical positions focuses on specific events, price anomalies or market inefficiencies that drive short-term share performance.
The potential to produce a return of more than zero from Japan may be attractive to investors because the region has experienced many false dawns over the years and long-only funds investing the region can be volatile. However, absolute returns are not guaranteed and investors may experience short-term periods of negative performance.