Aim: Growth by investing in long in UK equities and synthetically short using derivatives
Minimum investment: Lump sum £1,000, monthly £100
Investment split: 100% in UK equities and derivatives
Isa link: Yes
Charges:Initial 4%, annual 1.25%, performance fee 20%
Commission:Initial 3%, renewal 0.5%
Tel: 020 7208 1400
This fund aims to produce positive returns independently of market conditions by investing long in UK equities and taking synthetic short positions using derivatives.
Putting the fund into its market context, Hargreaves Lansdown senior analyst Meera Patel says: “Investors who are concerned that markets are likely to stay volatile for some time and even fall from current levels may find absolute return funds appealing. They could form the core of a portfolio around which other funds can be built.”
She observes that as an absolute return fund, this product aims to deliver positive returns each year. It will also aim to outperform the FTSE All Share Index over an economic cycle. “Not all absolute return funds aim for this – many simply aim to deliver a positive return and nothing more,” says Patel.
Patel points out that Odey’s investment strategy involves identifying major trends in the market followed by careful stock selection, which has been successful for Crispin Odey over the years.
“The fund essentially looks to profit from shares that rise in value as well as those that fall in value. Companies whose share prices rise in value are likely to be market leaders in their field with solid brand strength, earnings visibility and strong balance sheets with prudent accounting.
Odey will also look to benefit from companies whose prospects it believes are poor and likely to worsen. It will therefore go short on these stocks,” says Patel.
This is Odey’s first UK-only strategy, but Patel says it has invested in the UK for some time. “This will be a best ideas fund with concentrated portfolio of 40 to 50 stocks and so will be higher risk, but with the additional risk comes opportunity for growth,” she says.
Discussing the potential weaknesses of the fund, Patel says: “Crispin Odey is highly experienced, but he is the assistant fund manager on this fund. The lead manager is James Hanbury, and my main concern is the level of experience he has in shorting stocks. This is unclear from the product literature. All we have to go on is a paper portfolio since January 2009. This is in positive territory but it is not based on a real portfolio. “
Patel believes that shorting stocks requires a particular skill and it can potentially go horribly wrong. “Going long on a stock and getting it wrong means that the most you can lose is 100 per cent. Getting a short wrong, on the other hand, could potentially lead to infinite losses. I would prefer to see a track record of some sort.”
The charges also feature in Patel’s criticisms of the fund. “It has an annual management charge of 1.25 per cent plus a 20 per cent performance fee on any positive return. On the whole, we do not like performance fees. One of the problems with performance fees is the benchmark used to calculate the fee. We can argue that any active fund manager should be able to deliver positive returns in the longer term so performance fees can make these types of funds expensive. “
She says she would have given the fund a higher score out of 10 than seven if there were no performance fees or questions over the manager’s track record.
Finally, Patel thinks that investors need to be aware that these types of funds can get left behind in a strong market rally. “Advisers must make clients aware of this as the fund, while it may make positive returns, it could underperform if there is a recovery in markets.”
The main competition in Patel’s view include BlackRock UK absolute alpha, Cazenove UK absolute target, SVM UK absolute alpha return and Gartmore UK absolute return funds.
Patel concludes: “Given the flexibility of Ucits III, these funds can have different exposures to the equity market at any one given time and so the performance and the underlying portfolios could vary considerably.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average