The SVM UK absolute return fund was launched in response to long-only portfolios not having the investment tools to produce positive returns as markets struggle with the global economic downturn. Under Ucits III, this fund can benefit from share price falls through a form of short selling.
Short selling is where fund managers make a profit by borrowing shares, selling them and buying them back when the price has fallen. Ucits III does not allow fund managers to short securities directly as hedge funds can, but the same effect can be achieved using derivatives. This is known as synthetic shorting.
Returns will also be generated in the usual way, by holding companies with share prices that are expected to rise. These will be selected through detailed analysis and may include firms such as AstraZeneca. This was lowly rated at the start of 2008 but has performed well.
On the short side, ideas may be generated from research on the long side of the portfolio. They may be stocks that have been sold from the long portfolio as they have become overvalued, or where earnings downgrades or balance sheet problems are expected.
Lead manager Colin McLean founded SVM in 1990 and has over 30 years’ investment experience. This includes 16 years running long/short portfolios, which means he has experience of managing long/short portfolios in bull and bear markets.
The new fund is based on the SVM Saltire, a UK long/short fund launched in 2002. SVM Saltire aims to capture around 80 per cent of the upside in a rising market and SVM says it has never had a 12 month period in which it lost money for investors.
This may provide some comfort to advisers who feel that an absolute return fund would be useful for clients, but who are concerned about the synthetic shorting ability of some fund managers. However, as with all absolute return funds, there is no guarantee that it will produce positive returns at all times.