Absolute return funds come in many forms, though they share a common goal: to minimise the impact of falling stock markets. Funds in this sector generally aim to generate a positive return over the long term, regardless of changing market conditions.
As well as investing in shares they believe will rise in value over time, the managers of these funds also look to profit from shares they believe will fall in value (known as shorting). If the latter strategy proves positive, it could help reduce volatility. However, if the wrong decisions are made the fund will lose money, even in a rising market.
Tim Russell will use such an approach to manage the TM Sanditon UK Select Fund, which will launch on 17 December 2014. The fund will aim to produce a positive real return (ahead of inflation) in order to grow the real value of investors' capital, though there are no guarantees this will be achieved.
Tim Russell looks carefully at how the business cycle affects company prospects, recognising different stocks are capable of better performance at different stages of the cycle. As part of this approach, he will take into account the earnings potential and valuation of individual companies, and how those attributes could be affected by changes in the broader economic environment. In an economic slowdown, for example, the fund is likely to be tilted towards defensive companies, while it will generally be biased towards companies able to benefit from an improving economy in a recovery.
Presently, the manager believes the economy is in the latter stages of the expansionary phase of the business cycle. As such, the fund is likely to have a bias towards more defensive areas of the market including larger companies such as BT and Diageo. More economically-sensitive holdings will be biased toward the consumer, such as Mothercare and Home Retail Group, which Tim Russell expects will be beneficiaries of the recent sharp fall in the oil price. Elsewhere, he will short shares he believes to be overvalued and exposed to a market setback, including Primark owner Associated British Foods.
Our view on this fund
Tim Russell has managed portfolios of UK shares for over twenty years. He initially managed a number of UK equity income portfolios with great success.
He also has a history of managing portfolios with an absolute return strategy. He managed the Cazenove UK Equity Absolute Return Fund from October 2003 to June 2011; a hedge fund targeted at institutional investors. Over this time the fund delivered a respectable 54.1%, equating to an annualised return of 5.8%. The Cazenove UK Absolute Target Fund (now the Schroder UK Absolute Target Fund), which was based on the hedge fund and is available to retail investors, launched in July 2008. The manager also ran this fund until June 2011 and over his tenure the fund grew by a disappointing 3.4%. Please note past performance should not be seen as an indicator of future returns.
|Annual percentage growth|
| Nov 09 -
| Nov 10 -
| Nov 11 -
| Nov 12 -
| Nov 13 -
|Schroder UK Absolute Target||-6.1%||8.5%||3.3%||10.1%||-3.6%|
Past performance is not a guide to future returns. Source: Lipper IM* to 01/12/2014
Each of these funds aimed to deliver an annual return of 10% each year after charges over the medium term. Both struggled to meet their objectives over his tenure. Prior to 2009, interest rates were considerably higher and the manager felt the target could be easily achieved given each fund retained a large position in cash, on which they would earn a healthy rate of interest. However, interest rates fell to 0.5%, making this target harder to achieve.
Overall, we view Tim Russell as an experienced, capable manager, with the potential to deliver decent returns for investors over the long term, though this new portfolio will behave and perform differently from previous funds. The manager will aim for the fund to exhibit lower volatility than the wider market. However, like all absolute return funds, there are no guarantees a positive return will be achieved across all time periods.
It should be noted the fund carries a performance fee of 15% on any outperformance of RPIX (Retail Price Index excluding mortgage interest payments) +2% on an annual basis. An annual management charge of 1.25% also applies, which we view as expensive compared with other funds in this sector. In a world where the cost of investing has fallen for many funds, we view the overall fee structure as unattractive. Investors considering an investment should ensure they read the fund's Key Investor Information Document which contains further details of the risks involved and performance fee criteria.
At present, this fund will not be added to the Wealth 150 list of our favourite funds across the major sectors, though we will monitor performance and inform investors if our views change.