It has been a challenging couple of years in the stock market since this fund launched in July 2008. It has made a small profit of 1%*, broadly in line with the UK stockmarket but with significantly less volatility. Although remember that past performance is not a guide to future returns. We had expected better returns and the fund has been particularly disappointing over the last couple of months. So we spoke to the manager, Tim Russell, to find out why.
Let me start by giving Mr Russell’s view on the economy, which is generally rather gloomy. He sees a significant chance of a double dip recession, with the UK consumer constrained by rising taxes and a continued stagnation in wages and levels of employment. He has therefore retained a defensive stance in the fund, which ironically has been the main cause of its recent poor performance.
He has taken positions in defensive companies such as GlaxoSmithKline and ‘shorted’ economically sensitive stocks such as miners (see explanation below for how shorting works). Since the start of the year, and until very recently, mining and resources stocks performed well, despite the prices of many commodities falling. This hurt the fund because Tim Russell had expected these stocks to underperform the market.
Commodity stocks did in fact perform poorly in the recent market sell-off, but the fund’s holdings of defensive stocks were also hit badly. The strong earnings from defensive companies have largely been overlooked, unfairly in my view, and the market simply isn’t recognising the value in companies with healthy balance sheets, robust earnings and good yields.
So the fund has been hit on two fronts: the relative strength of commodities related firms and the continued underperformance of the more defensive sectors. Mr Russell retains his view that high yielding, defensive stocks look good value – a belief I share along with many UK fund managers. In my view, many of the factors driving share prices seem to be related to general global economic concerns. When these subside, the value in defensive firms should start to be recognised.
So whilst it has been a frustrating time for unit holders I feel more patience is required to allow the prospects of individual companies to show through. I have confidence in Tim Russell’s ability; he is an experienced manager who has shown he can add value for investors throughout his career. I will continue to hold the fund and I suggest other investors consider doing the same.
If you are considering an investment please ensure you read the fund key features first. Please also note the fund has a performance fee.
*source: Lipper Hindsight 18/07/08 to 01/06/10
| % Growth 01/06/2009 to 01/06/2010 | |
|---|---|
| Cazenove UK Absolute Target | 0.91 |
Full year performance figures before this date are unavailable.
Shorting - an explanation
Traditionally investors buy assets they believe will rise in value. Shorting is different. The principle is that the fund manager borrows shares he believes will fall in value and then sells them, hoping that by the time he needs to repay the lender the share price will have fallen. The difference between the two prices is the profit or loss. For example:1. Manager borrows 10,000 shares and sells them for £2 each = £20,000.
2. Purchases these shares six months later at 80p each, cost = £8,000.
3. Profit = £12,000
Had the share price risen by the same amount, it would have cost more to purchase the shares than received from selling them, resulting in a £12,000 loss. Shorting can be effected in a number of ways; fund managers generally short via contracts with a broker rather than actually taking delivery of the shares. This example also ignores transaction and other costs, but it hopefully explains the principle.
The value of investments can go down as well as up, this means you could get back less than you invested. Therefore all investments should be regarded with a long term view. No news or research item is a personal recommendation to deal. If you are unsure about the suitability of an investment please contact us for advice.
