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November 2014 - Targeted Absolute Return

Equity markets in general are still in long-term uptrends, but they have recently become a lot more volatile, as a result of concerns over the ending of quantitative easing in the US; although the Bank of Japan has taken up the reins and the ECB may not be far behind. Geopolitical tensions in the Ukraine and the Middle East are not helping sentiment either and in many parts of the world elections are looming, most notably here in the UK.

With all this uncertainty, markets have started to exhibit greater volatility, which can create additional risk in investors’ portfolios. Traditionally the safe haven in such events is the bond market and sovereign issues such as UK Gilts and US Treasuries in particular. However the relentless downward pressure on interest rates makes these investments very expensive and the income they generate is negative after allowing for even the current modest levels of inflation.

One possible answer to this dilemma is to consider if targeted absolute return funds might be the solution. In this sector there are currently 77 funds, with a wide variety of strategies and risk profiles. The funds that may help reduce portfolio volatility will target that characteristic by focusing on investments with fixed investment terms with low risk or by hedging risk, most commonly by using futures and options, as well as by selling stocks short that they believe will fall in price.

There are some very large and well known funds in this sector, but at FundCalibre we have been looking at some of the lesser lights, which we believe to be no less effective in dampening volatility within a portfolio.

The Elite Rated Premier Defensive Growth fund seeks to deliver a consistent positive return in all market conditions by investing in a portfolio of assets that offer a predictable return over a defined period of time. This strategy has been thoroughly tested by a wide variety of market conditions and has continued to deliver. It has a current percentage volatility of the UK equity market of 12% (Data from Financial Express).

The Elite Rated Smith & Williamson Enterprise fund has a return target of 8-10% per annum on a 12 month rolling basis, but with significantly lower volatility that the FTSE UK index. The team have been running the fund since 2006 and have considerable experience with this relatively new strategy to the UK retail market. It has a current percentage volatility of the UK equity market of 54% (Data from Financial Express.

The Elite Rated Henderson UK Absolute Return fund is a stock-picking fund that aims to deliver 10% p.a. in all market conditions. The managers look to identify stocks that will either exceed or fall short of analysts’ expectations, and construct a portfolio of both long and short positions. There are limits on the overall market exposure, which serves to reduce the volatility of the fund. This fund has a performance fee. It has a current percentage volatility of the UK equity market of 40% (Data from Financial Express)

The Newton Real Return fund is one of the larger funds in the sector and is designed to provide positive returns, targeting cash plus 2.5%, in any market conditions. The process is primarily bottom-up, with the fund manager looking to identify companies which are undervalued. There are strict limits on the overall market exposure, which serves to reduce the risk of the fund significantly. The strategy has performed well in both rising and falling markets. It has a current percentage volatility of the UK equity market of 43%. (Data from Financial Express)

The Elite Rated Old Mutual Global Equity Absolute Return fund whilst by no means one of the “lesser lights” has impressive diversification characteristics and an excellent investment process that seeks to avoid the usual unintended consequences of taking multiple positions. It has a current percentage volatility of the UK equity market of 42%.(Data from Financial Express)

Performance of discussed funds from 21/12/2010 - 12/11/2014, FE


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Clive Hale, Director - November 2014

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