Mark Lyttleton, the manager of the £2 billion BlackRock UK absolute alpha fund, has expressed disappointment with its short-term performance but dismissed concerns about the size of the portfolio.
He says over-optimism on valuations this year was the key factor in underperformance, with the vehicle’s net long positioning leaving it exposed as markets fell.
Over the first half of the year the fund fell 2.2 per cent, although it has returned to positive territory for the 12 months to August 9.
“Poor performance of the short portfolio was largely due to the strength of the FTSE 250, which we had used to reduce market exposure,” says Lyttleton. “We felt the FTSE 250’s more domestic focus made it particularly vulnerable, but in the short term this analysis proved flawed.”
Lyttleton’s long-only UK dynamic fund is also behind the index this year and he says the market has not recognised good operational news at many of his long bets.
“Overall, the team is comfortable with the balance on the long side between cyclical holdings – where mid-cycle valuations look attractive – quality long-term growth companies and lowly valued defensive earnings streams,” he adds.
Lyttleton has cut long positions in companies sensitive to government spending on his long book. He has also taken shorts in stocks whose revenues are largely from the private sector but for which government subsidy is over 100 per cent of profit.