Funds Centre

Gartmore UK Absolute Return - new fund launch

As uncertainty abounds and markets remain volatile this has led to a new breed of funds: absolute return funds. Gartmore is launching a UK Absolute Return Fund on 30th April 2009 with the aim to deliver positive returns each year regardless of market

conditions. This is not a one way bet however, and relies upon the skills of the manager to make the right decisions.The fund will be managed by Ben Wallace, who already manages a fund with a similar strategy (that is not available to most private investors). This strategy involves investing in shares that he believes will rise in value over time (this is referred to as ‘long only’ investing) and he will also look to profit from shares that he believes will fall in value (this is referred to as ‘shorting’. This latter strategy could potentially increase risk if the manager makes the right call, but if the manager’s stock picking proves positive, this approach could help lower volatility.Depending on market conditions, the fund can hold anything between 65 to 125 holdings and it also has the flexibility to hold a substantial proportion of the portfolio in cash.Please note that this fund has a performance fee. Investors should be aware that on the whole, we do not like performance fees. One of the problems with performance fees is the benchmark used to calculate the fee. In this case, Gartmore charges an annual management charge of 1.5% plus a performance fee of 20% on any positive return made by the fund. We can argue that any active fund manager should be able to deliver positive returns in the longer term so we do feel Gartmore’s performance fee makes this fund expensive.Ben Wallace has slowly been building a successful track record over the last four years managing a hedge fund since its launch. This is a short track record and investors are relying on the skills of the fund manager to make them money, but so far the signs are encouraging. However, please note this fund is not currently on the Wealth 150 list of our favourite funds in each sector.Investors can buy the fund at launch at the fixed offer price of £1 from 14th April to 29th April 2009.Meera Patel, Senior Analyst> Key Features of the Gartmore UK Absolute Return 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.