Funds Centre

BlackRock European Absolute Alpha - new launch

The BlackRock European Absolute Alpha Fund launches on 31st March 2009. It seeks to deliver a positive return each year regardless of general market conditions. This can be achieved through a combination of traditional investing and ‘shorting’,

which allows a manager to potentially profit from falling share prices (see below for more information). There are however, no guarantees and, like other funds, performance relies upon the manager making the right decisions.The fund is managed by Vincent Devlin, who also runs the BlackRock Continental European Fund and joined the firm in early 2008 from SWIP.As well as buying shares in companies he thinks will prosper, and shorting those he thinks will struggle, Mr Devlin will also employ a technique known as ‘pairs’. This is where shares are bought in one company, and an equal ‘short’ investment is made in a similar company (often in the same sector). Providing the first company’s shares do better than the second’s, whether they go up or down, the fund will be in profit. This allows fund managers to take advantage of situations where they perceive one company is being significantly over- or under-valued compared to its peers. These strategies are likely to restrict performance during a bull market, during which time this fund should underperform European funds with a more traditional style.Vincent Devlin has a good record of running traditional funds, firstly at SWIP then at BlackRock. However, managing an absolute return fund requires an additional set of skills and Mr Devlin has not run one before. At this stage we are reserving judgement on his ability and the BlackRock European Absolute Alpha Fund is not part of the Wealth 150, our list of favourite funds in each sector.Investors should be aware that this fund carries a performance fee; more details can be found in the fund’s key features.Stuart Goodwin, Analyst» Key Features of the BlackRock European Absolute Alpha FundShorting – an explanationTraditionally 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 = £20,0002. Purchase these shares six months later at 80p each = £8,0003. Profit = £12,000In 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 BlackRock short by entering into contracts with a broker and do 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.