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IIID is the new perspective

One of the surprise hits in the fund world in the last six months has been the BlackRock UK absolute alpha fund. It has seemingly come from nowhere to take the market by storm and I am sure all the BlackRock salespeople are rubbing their hands with glee.

What has made this fund so popular is the way it aims to deliver positive returns regardless of the direction of the market. The market goes down by 7 per cent and the BlackRock fund rises by 0.5 per cent. It is that kind of scenario that has attracted the masses.

The phenomenal sales figures have obviously attracted the attention of other fund management groups looking to cash in. Many similar funds have been launched or are due for launch in the near future. Many of these are looking to provide an absolute return by using the full Ucits III powers with a variety of different strategies. One such fund is the Sarasin Globalsar IIID fund.

This fund is approaching its two-year anniversary, having been set up in May 2006, but the underlying Sarasin Globalsar fund that shares many similarities has been around for over 20 years and delivered almost a 10 per cent compound annual growth rate.

The IIID Globalsar fund is basically the original fund but with all the Ucits III bells and whistles. Globalsar was originally launched to be a single portfolio solution holding bonds, equities and cash but Ucits III allows that to be taken to another level.

Fund manager Daniel Briggs has been with Sarasin for six years but has over 25 years in the investment industry with Schroders, Henderson and JP Morgan.

His background is primarily in equities but more recently he has been focusing on balanced mandates. Globalsar looks to produce steady capital gains but with lower volatility than equities. The IIID fund has a more explicit target. It is looking to deliver at least 3.5 per cent above the retail price index over three-year rolling periods. This currently equates to about 7.5 to 8 per cent a year.

It is worth noting at this point that although I am comparing the fund with BlackRock’s fund, it has not got the same low level of net exposure to equities and is not such an absolute return focused fund.

Briggs has significant flexibility within the fund. His equity exposure can be between 10 and 60 per cent, his fixed-interest exposure can be between 0 and 70 per cent, cash can be between 0 and 30 per cent and he can hold up to 25 per cent in alternatives, including hedge structures, private equity, commodities, foreign exchange, structured products or derivatives.

He effectively has a blank canvas from which to construct his portfolio.

Inflation-sensitive and absolute alpha are the two main asset classes, with real return assets sitting in between the two.

Inflation-sensitive includes assets such as commodities, gold and index-linked bonds, whereas examples on the absolute alpha side are private equity, hedge structures and long/short equities. The real return assets include specialist equity such as emerging markets, real estate and asset-rich or cash-rich dividend growth stories.

Asset allocation is the key to this fund and Briggs sees himself as the gatekeeper, using Sarasin’s thematic approach to equity investing but also allowing other asset classes into the portfolio. He needs a high degree of conviction to allow something new in the portfolio.

The core of the portfolio is in long/short global thematic equities that are hopefully inflation protected – Sarasin’s area of expertise. Core themes will account for 40 to 80 per cent of the portfolio. It is important to note that this is not a hedge fund. It is looking to constrain market risk so will have a degree of risk aversion but not at the expense of losing upside.

Continuing on that theme, net exposure to equities will be no more than 60 per cent and is currently around 35 per cent. Futures and derivatives are used to change asset allocation quickly. Covered and uncovered calls are used to provide some downside protection to the portfolio as well as pairs trading, again building on the long-term thematic approach.

It is interesting to note that the IIID fund has outperformed the original Globalsar fund since launch almost two years. That is probably a sign of the volatile markets but I can definitely see a long-term case where the IIID fund becomes the norm.

Over the coming months and probably years, you will see many of these types of fund being launched. I would probably urge a slight degree of caution because not every group is suited to managing absolute return funds.

I think Sarasin is one of the groups which are and so far it has done well. If the idea of a global fund that looks to take some market risk while reducing volatility appeals to you, this fund is well worth a look.

Ben Yearsley is investment manager at Hargreaves Lansdown


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