Most absolute return funds adopt one particular strategy or concentrate on a single asset class. SLI Global Absolute Return Strategies (GARS) is different. It brings together 20 to 30 strategies involving a range of assets including currencies, equities and bonds, and also variables such as interest rates. Using so many strategies tends to dampen volatility. The managers aim to provide returns of 5% a year in excess of LIBOR (UK interbank interest rates) on a rolling three-year basis, though as with all investments this is not guaranteed and it can fall in value as well as rise.
The construction of the portfolio begins with SLI's 'house view' of the economic environment over the next three years. Presently they believe interest rates will stay low for an extended period, government bonds are overvalued and market volatility is likely to remain high.
Although the best outcome for the fund is likely to be achieved if SLI's central view is proved correct, the strategies that GARS comprises are designed to perform in a number of economic scenarios. For example, they see the euro continuing to depreciate against the US dollar, regardless of whether the euro zone debt crisis can be resolved. They are therefore 'short' (see explanation below) on the euro against the pound. Investors should note that the fund's use of derivatives brings additional risks.
Current themes in the portfolio include the view that many European banks need to restructure and raise more cash through rights issues. The team believe this will lead to falling share prices, but improving prices of their bonds as they become better able to service and repay their debts. They are therefore investing in the bonds whilst 'shorting' the equity. They are also keen on the prospects for resource-based economies and have positions in Russian equities, Mexican government bonds and the Brazilian currency.
Some 25 individuals are involved in running GARS, and despite the recent departure of three members of the team, we believe they have the necessary strength and resources to carry on performing well. Following an excellent start to the year fund performance has been relatively flat over the past few months, though with such a wide variety of strategies within the fund such periods are to be expected. Over the longer term, returns have been strong, with the fund rising 33% since launch versus 10% for the average fund in the sector.* Please note past performance is not a guide to future returns.
|% Growth 01/11/07 to 03/11/08||% Growth 03/11/08 to 02/11/09||% Growth 02/11/09 to 01/11/10||% Growth 01/11/10 to 01/11/11||% Growth 01/11/11 to 01/11/12|
|SLI Global Absolute Return Strategies Fund||n/a||19.9%||11.0%||1.6%||5.6%|
|IMA Absolute Return||-2.2%||10.5%||2.7%||0.1%||2.5%|
Full year performance figures prior to this date are not available. *Source: Lipper 07/05/2008 to 01/11/12
I believe GARS is well worth considering as a long-term holding that doesn't solely rely on the performance of the stock market - it could be a good tool to diversify a portfolio. We also like the fact that, unlike many funds in the sector, there is no performance fee and we are pleased to retain it in our Wealth 150 list of favourite funds.
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.
|Fund manager's initial charge||4.00%|
|HL saving on initial charge||4.00%|
|Net initial charge||0.00%|
|Fund manager's annual charge||1.50%|
|HL annual saving||0.10%*|
*Annual saving is not available in the SIPP or Junior ISA