After a bad period of performance during much of 2008, the SVM UK Opportunities Fund has bounced back superbly and delivered growth of 102% over the last year (3/11/08 to 2/11/09). The most important thing, however, is to look forward rather than back; after all past performance is not a reliable guide to the future.
The fund has always been managed with an aggressive style, and will continue to be in future. However, to give the fund manager extra tools with which to better control volatility SVM has opted to make use of a sophisticated investment technique known as ‘shorting’. This allows Neil Veitch, the fund manager, to potentially profit from falling share prices (see below for explanation). SVM say that the ‘short’ exposure will usually be less than 20% of the fund, and cannot exceed 50%.
When used well, shorting can be an excellent way to reduce a fund’s volatility in the face of falling markets. It is a difficult skill, however, and places additional pressure on the fund manager to make the right decisions; mistakes mean that an investment could lose money, even if the market rises. Neil Veitch does not have much experience of shorting, although other fund managers at SVM have expertise from which he can learn.
In light of this we have decided to remove the SVM UK Opportunities Fund from the Wealth 150, our list of favourite funds in each sector. Please note that this is not a recommendation to switch out of the fund. We simply believe it is worth waiting to see how the fund’s new investment approach works in practice before considering the investment of new money.
Past performance is not a guide to the future. Source: Lipper.
Stuart Goodwin, Analyst
>Key Features of the SVM UK Opportunities Fund
The fund has always been managed with an aggressive style, and will continue to be in future. However, to give the fund manager extra tools with which to better control volatility SVM has opted to make use of a sophisticated investment technique known as ‘shorting’. This allows Neil Veitch, the fund manager, to potentially profit from falling share prices (see below for explanation). SVM say that the ‘short’ exposure will usually be less than 20% of the fund, and cannot exceed 50%.
When used well, shorting can be an excellent way to reduce a fund’s volatility in the face of falling markets. It is a difficult skill, however, and places additional pressure on the fund manager to make the right decisions; mistakes mean that an investment could lose money, even if the market rises. Neil Veitch does not have much experience of shorting, although other fund managers at SVM have expertise from which he can learn.
In light of this we have decided to remove the SVM UK Opportunities Fund from the Wealth 150, our list of favourite funds in each sector. Please note that this is not a recommendation to switch out of the fund. We simply believe it is worth waiting to see how the fund’s new investment approach works in practice before considering the investment of new money.
| % Growth 01/11/2004 To 01/11/2005 | % Growth 01/11/2005 To 01/11/2006 | % Growth 01/11/2006 To 01/11/2007 | % Growth 01/11/2007 To 03/11/2008 | % Growth 03/11/2008 To 02/11/2009 | |
| SVM UK Opportunities | 19.09 | 39.73 | 16.7 | -61.21 | 102.31 |
| IMA UK All Companies | 18.23 | 21.33 | 11.42 | -36.39 | 24.89 |
Stuart Goodwin, Analyst
>Key Features of the SVM UK Opportunities Fund
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.
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.
