Legal & General has launched a European Absolute Return Fund which aims to deliver positive absolute returns over time regardless of market conditions.
The fund is managed by Gavin Launder and Ian King. They may not be well known by private investors but they have built up experience in managing hedge funds prior to joining Legal & General. Hedge funds can employ similar strategies to absolute return funds.
Absolute return funds are different from most conventional funds as they look to profit from shares that fall in value by using a shorting strategy (please see below for an explanation) as well as looking to benefit from rising share prices. While shorting can provide the capacity to enhance returns over the long term when used well, it is entirely dependent on the skills of the manager to make the right decisions and so does present an additional investment risk to the fund.
The fund will concentrate on the managers’ best ideas and will be a focused portfolio of around 20 to 25 positions. While this concentration could increase risk, the managers will look to buy into companies which are cash-generative and have improving prospects, and they will look to ‘short’ companies that have a deteriorating outlook.
Given its strategy, the fund could underperform in a sharply rising market, but in a falling market we would expect it to outperform.
The fund has an annual charge of 1.5% and a performance fee of 20% of any outperformance of 3 month LIBOR (London Interbank Offered Rate – the interest rate at which banks lend to each other). Whilst as a rule we are against performance fees, they are common on this type of fund. Investors must consider the performance potential of their investment when assessing whether a performance fee is worth paying.
We would like to see how the fund performs over time. For this reason, it is not on the Wealth 150 list of our favourite funds in each sector.
Traditionally investors buy assets they believe will rise in value. Shorting is different.
The principle is that the fund manager actually sells shares they don’t own. This in effect means he owes the buyer the shares. The buyer agrees they will not take delivery of the shares for, say, six months and the fund manager hopes that by then the share price will have fallen. After six months the fund manager purchases the shares in the market and passes them on to his buyer. The difference between the two prices is the profit or loss. For example:
1. Fund manager sells short 10,000 shares at £2 each = £20,000
2. Purchase these shares six months later at 80p each = £8,000
3. Profit = £12,000
In this example had the share price risen by the same amount, it would have cost the manager more to purchase the shares than they made from selling them and they would have made a £12,000 loss. There are many ways of effecting this investment strategy and managers may short by entering into contracts with a broker and not actually take delivery of the shares. Therefore this is not an exact description of how it happens, and ignores transaction and other costs, but it hopefully explains the principle.
The fund is managed by Gavin Launder and Ian King. They may not be well known by private investors but they have built up experience in managing hedge funds prior to joining Legal & General. Hedge funds can employ similar strategies to absolute return funds.
Absolute return funds are different from most conventional funds as they look to profit from shares that fall in value by using a shorting strategy (please see below for an explanation) as well as looking to benefit from rising share prices. While shorting can provide the capacity to enhance returns over the long term when used well, it is entirely dependent on the skills of the manager to make the right decisions and so does present an additional investment risk to the fund.
The fund will concentrate on the managers’ best ideas and will be a focused portfolio of around 20 to 25 positions. While this concentration could increase risk, the managers will look to buy into companies which are cash-generative and have improving prospects, and they will look to ‘short’ companies that have a deteriorating outlook.
Given its strategy, the fund could underperform in a sharply rising market, but in a falling market we would expect it to outperform.
The fund has an annual charge of 1.5% and a performance fee of 20% of any outperformance of 3 month LIBOR (London Interbank Offered Rate – the interest rate at which banks lend to each other). Whilst as a rule we are against performance fees, they are common on this type of fund. Investors must consider the performance potential of their investment when assessing whether a performance fee is worth paying.
We would like to see how the fund performs over time. For this reason, it is not on the Wealth 150 list of our favourite funds in each sector.
Shorting - an explanation
Traditionally investors buy assets they believe will rise in value. Shorting is different.
The principle is that the fund manager actually sells shares they don’t own. This in effect means he owes the buyer the shares. The buyer agrees they will not take delivery of the shares for, say, six months and the fund manager hopes that by then the share price will have fallen. After six months the fund manager purchases the shares in the market and passes them on to his buyer. The difference between the two prices is the profit or loss. For example:
1. Fund manager sells short 10,000 shares at £2 each = £20,000
2. Purchase these shares six months later at 80p each = £8,000
3. Profit = £12,000
In this example had the share price risen by the same amount, it would have cost the manager more to purchase the shares than they made from selling them and they would have made a £12,000 loss. There are many ways of effecting this investment strategy and managers may short by entering into contracts with a broker and not actually take delivery of the shares. Therefore this is not an exact description of how it happens, and ignores transaction and other costs, but it hopefully explains the principle.
