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The bear essentials

Ihave focused on one of the Miton Optimal funds – the strategic fund – already. It has had a hard time this year due to a big cash bias and its limited ability to buy into alternative asset classes.

Miton therefore proposes to launch the Arcturus fund, which will be a non-Ucits retail scheme taking advantage of the 2007 Coll directive. What this means is it can invest in equities, bonds, cash, gold, property, hedge funds and more, targeting investment instruments that the strategic fund cannot.

The highly experienced management team consists of Tom McGrath, Steve Brann and Scott Campbell. McGrath’s investment career started with Invesco’s private-client advisory department, from where he moved into the structured products division at Close Brothers. Campbell, a New Zealander, started his career in 1989 at AMB Group before joining Appleton in 1996. He set up his own institutional offshore business which resulted in the creation of Optimal Fund Management in July 2002. Some funds in Appleton’s range achieved a five-star rating from Standard & Poor’s.

Finally, Brann began his career at UBS in 1987 and in 1997 became director of proprietary trading at Dresdner Kleinwort Benson. He later moved to Bank of America where he was head of European equity proprietary trading. Clearly, this is not a bad team.

Miton’s philosophy boils down to asset allocation, which it sees as the most important element of long-term performance. It believes that, in order of importance, macroeconomic research, geographical exposure, sector bias and market-cap bias determine 90 per cent of the fund’s return. The remaining 10 per cent is down to its selection of funds.

Of course, that presumes that it can consistently make the right macroeconomic calls. Unfortunately, that is notoriously difficult, not least because economic data is often unreliable and does not always have the impact on the markets that one might think. I have met many a fund manager who has made the correct macro call but his bottom-up selection has gone completely wrong. To be fair to Miton, it does have an impressive record of making good calls.

The fund’s target return is Libor plus 3 per cent, with a volatility of 4 to 6 per cent, with the objective to deliver positive returns throughout all market conditions and cycles. It will be using hedge funds but the idea is to reduce risk and not increase it. If it can achieve all that, I am sure clients will be delighted.

Miton will blend asset classes with a low corre- lation to traditional equity portfolios in order to smooth returns. The model portfolio will have 20 per cent in hedge funds, 20 per cent in equities, 10 per cent in bonds, 10 per cent in the money market, 15 per cent structured products, 5 per cent in gold and 20 per cent in property. In back-testing, this model portfolio would have provided a remarkably smooth return over the last 10 years, including the bear market of 2001/03. Back-testing is not necessarily a very reliable tool but there is no doubt that a portfolio made of different asset classes over the last 10 years would have done well.

My only concern is that most asset classes now look relatively expensive. Property is only a good diversifier when it is not overvalued, which I believe it currently is. Nor am I a believer in hedge funds being a true alternative asset class as they are still an investment in equities. However, I do understand that many clients want different strategies since long-only equities suffer the full force of a bear market when it hits. Clearly, this type of fund could be very useful in self-invested personal pension portfolios once clients have accumulated a big sum of money.

The fund has an annual management charge of 1.25 per cent and a performance fee of 10 per cent for returns above Libor. It also has an institutional share class with a lower AMC but a higher performance fee. Performance fees are an article in themselves but suffice to say that in many cases I believe clients end up paying more for what they used to get for less. In certain circumstances, I do understand that they can help lock in fund managers for the long term.

Finally, if you are wondering what Arcturus means, it is a Greek word meaning guardian of the bears. Very appropriate for a fund of this nature.

Mark Dampier is head of research at Hargreaves Lansdown

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