Aim: Growth by investing long and short in US equities, equity instruments and derivatives
Minimum investment: Lump sum £1,000, monthly £50
Investment split: 100% in US equities, equity instruments and derivatives
Isa link: Yes
Pep transfers: Yes
Charges: Initial 4%, annual 1.6%
Commission; Initial up to 3%, renewal 0.5%
Tel; 0800 587 2111
The UBS US equity 130/30 fund is an Oeic aiming for growth and income by investing in US companies using long and short techniques. It differs from a hedge fund in that it will use derivatives and swaps to create the short positions, as this is the only form of shorting allowed under the Ucits III rules.
The 130/30 strategy involves investing in long-only portfolio, selling short 30 per cent of the value of this portfolio in stocks expected to fall in price, then reinvesting the proceeds from the short sales in the long-only portfolio. This strategy aims to produce higher returns than long-only funds.
Hargreaves Lansdown senior analyst Meera Patel believes this fund could act as a diversifier in a broader portfolio. She adds that after four years of positive returns from equity markets, volatility is expected to rise as we have already seen in recent weeks. “A fund like this could potentially provide a hedge against equity market falls as it can short 30 per cent of the portfolio. In theory, over the longer term this fund could generate returns over and above long only funds,” she says.
Given that the fund can short stocks. Patel says that this can potentially act as another source of alpha – the term used to describe the return above the benchmark index – in addition to the long only part of the portfolio. However, she stresses that this will only be the case if the right stocks are chosen.
“The fund aims to outperform the Russell 1000 Index by 2.5-5 per cent over a market cycle. This doesn’t sound like a bad target given that few US fund managers actually outperform the main index each year. Whether it can be achieved through this new structure remains to be seen.”
Turning to the potential drawbacks of the fund Patel says: “This is a relatively new concept to the UK market and we have yet to see if this product can generate good returns in different market conditions. As with any new concept, I believe it is sensible to treat them with some form of scepticism, especially when you understand the downside risks.”
According to Patel, the major downside risk would be on the shorting side of the equation. “If any of the short positions went against the fund, then the size and performance of the shorts could be magnified. Having said this, the fund manager has implemented a limit of 3 per cent of the fund’s overall assets in a short, although these positions will typically be around 0.25-1.25 per cent.”
Patel observes that the problem with shorting stocks is that the wider market cannot usually see which stocks are being shorted. “There is therefore a problem of transparency as we may not be able to view all the underlying holdings. Shorting can also be expensive and while the annual charge on the fund is 1.6 per cent the total expense ration could be much higher than this. The fund may also have a high turnover so this may add to the overall cost as well, which would dilute any outperformance,” she says.
Patel points out that UBS has a big team based in the US, but adds that while the manager, Tom Digenan, has run a long only portfolio, it has struggled to outperform the S&P 500 every year except one. “You also need the right skills, and more so when it comes to shorting stock,s so I need convincing that the team can significantly add value over and above the benchmark,” she says.
Scanning the market for potential competitors Patel says: “This is the first 130/30 launch to the UK retail investor. However, Resolution, Old Mutual, JPMorgan and Threadneedle are looking at these products and may launch similar funds in due course, so competition is likely to grow from here.”
Patel concludes: “One of the problems many IFAs may encounter is explaining the technique of shorting in layman’s terms to clients. This is going to be a huge difficulty and it may put clients off if they struggle to understand exactly how it works..”
Suitability to market: Good
Investment strategy: Average
Adviser remuneration: Average