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Sterling efffort from Merrill Lynch

Merrill Lynch Investment Managers

Merrill Lynch UK Absolute Alpha Fund

Type: Unit trust

Aim: Growth by investing long and short in UK equities and equity-related securities including derivatives

Minimum investment: Lump sum 10,000, monthly 250

Investment split: 100% in UK equities and equity-related securities including derivatives

Isa link: No

Pep transfers: No

Charges: Initial 5%, annual 1.75%

Commission: Initial 3%, renewal 0.5%

Tel: 08457405405

The Merrill Lynch UK absolute alpha fund is a unit trust that takes full advantage of the Ucits III regulations. The fund aims to achieve positive returns in rising and falling markets by taking long and short positions in UK equities and derivatives.

Chase de Vere Financial Solutions research manager Justine Fearns thinks the fund will bring additional diversification to a portfolio and, in theory, help reduce volatility and generate returns.

She says: “It is a good time for Merrill Lynch to be bringing the UK Absolute Alpha fund to market. Mark Lyttleton, the manager, has been doing a sterling job on both the UK and UK dynamic funds and the tight-knit UK team as a whole has been performing well. Lyttleton has been running paper money in this way for some time with good results and has the backing of the Merrill Lynch hedge fund infrastructure that is already in place.”

Fearns says the fund takes care of the UK portion of asset allocation models. She says: “Even if its not used as the only UK equity proposition within a portfolio, and depending on the size of portfolio it probably shouldnt be, it could easily represent a proportion of it.”

Fearns points out there are three clear additions to the usual and highly accountable long only investment process employed by Lyttleton. He will be able to “synthetic short” stocks, make pair trades and invest 100 per cent in cash if he feels this is appropriate all of which Fearns believes will provide ample opportunity to protect investor capital.

“We shouldnt, however, consider this a miracle fund and should read the brochure headline “a fund designed to profit in all cycles of the UK stockmarket” with hindsight in mind,” says Fearns. She explains: “Despite the additional flexibility and investment horizon absolute return funds are very capable of losing money. The rest of the literature is concise, explaining the additional dynamics of the fund clearly. However, some of it, for example the graphs, is rather bullish and care should be taken that investors do not interpret it incorrectly.”

In Fearns view, adviser remuneration and the initial charge are industry standard but the annual management charge is slightly higher at 1.75 per cent, which is to cover the costs of additional risk monitoring, management and investment structure.

Turning her attention to the less attractive features of the fund, Fearns says: “There isnt a great deal to dislike about this product. The only thing I would say is that Merrill Lynch should take care how it positions the fund and take care not to over-promise on the performance in all markets.”

Considering at the likely competition, Fearns says: “More and more Ucits III funds are being launched. We saw them firstly in the bond arena with the Barings, Credit Suisse and UBS products, closely followed by the multi-manager arena through Gartmore and Schroders. There arent any single asset funds in the market to compete with this yet, though Im sure there will be many to follow.”

BROKER RATINGS

Suitability to market: Good
Investment strategy: Good
Charges: Average
Adviser remuneration: Average

Overall 7/10

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