Fund Features |
||||||||||||||||
|
Fund managers use innovation By Jeff Salway
When it comes to getting us to invest our money, fund houses are adept at coming up with new ways of skinning the same old cat. And - while investment products should be fairly straightforward - over the years the industry has contrived
Many of the most imaginative launches in the last couple of years are those that have taken advantage of a new set of investment rules known as UCITS III - the much needed acronym for Undertakings for Collective Investment in Transferable Securities. This change gave fund managers a whole new set of toys to play with, like derivatives and a wide range of other previously out-of-bounds money market instruments. "The new rules gave managers new powers that weren't available under the previous regime," explains Gavin Haynes, investment director at Whitechurch Securities. "They brought them more into line with Europe and with the capabilities that hedge funds have." Innovation or gimmick The companies behind these funds claim they are the height of innovation - enabling them to boost investors' returns and protect them against losses, depending on the objectives of the fund. But others in the industry suggest they're nothing more than a marketing gimmick. The key tool that distinguishes these funds is derivatives. Put simply, derivatives fund managers to make a bet on what might happen to the price of a particular asset in the future - bonds, shares, currencies or commodities for instance. The real attraction of this to fund managers is that it allows them to go 'short' on an asset and make money when prices are falling - something that they cannot achieve when they buy a conventional share. And it seems this has been all the excuse that some fund providers needed to launch a new generation of funds. Returns in a falling market The first batch to hit the shelves was a group of absolute return and target return funds. The aims of both these types of funds is to provide good returns regardless of market conditions. Absolute return managers claim that by using derivatives and long/short strategies they can keep making money even when the market isn't, or at least not lose any. With several volatile periods of late and fears growing that the bull market has ground to a halt, these funds are being marketed to more cautious investors who are happy to trade some upside for a degree of protection from market turbulence. Absolute return funds are also referred to as target return funds, but the two differ significantly, says Justin Modray, communications manager at IFA Bestinvest. "Target return funds sometimes use long/short strategies but are fixed interest-based and usually set specific targets, while absolute return funds are more equity based and take more risk." If you're nervous about the stockmarket - or want a less risky way of investing in equities as retirement approaches - target return funds in particular may seem attractive. This is why, when the introduction of the UCITS III rules prompted a rash of target return fund launches, they were promoted heavily. Mixed results To date, however, they have failed to deliver. As of the beginning of August, the majority of fixed interest-based target return funds, including those from Credit Suisse, Threadneedle, UBS and F&C, had failed to meet their targets. Absolute return funds have fared better. So far, the Merrill Lynch UK Absolute Alpha fund, launched in April 2005 and run by the popular Mark Lyttleton, has succeeded in riding the good market periods and surviving the bad. The Sarasin IIID EquiSar fund has also worked well since launching in summer 2006. As the access to tools such as derivatives suggests, these funds can differ greatly and direct comparison isn't always educational. So, if you're looking at putting some money in either an absolute or target return fund, you need to do your homework, warns Gavin Haynes. "Lots of managers only have long-only experience, so they won't be comfortable with long/short strategies and are unlikely to add value overnight." So if you believe markets are set for a more prolonged spell in the doldrums, are these funds a good way of shoring up your portfolio? "You would use them if you already have a portfolio that's diversified, especially at the low-risk end," says Ryan Hughes, a fund manager at Skandia Investment Managers. "You would want normal fixed interest exposure before introducing absolute return funds." The 130/30 fund A more recent advent is the 130/30 fund. These funds employ derivatives to gear the fund and boost returns. But while they have the potential for stellar returns, they also carry the risk of heavy losses. The idea with 130/30 funds is that 100% of the portfolio is invested in equities over the long-term, while an additional 30% is borrowed to go short on stocks the manager thinks will fall. That shorting is used to finance an extra 30% investment in good value stocks. While the 130/30 ball has only just started rolling in the UK, it's quickly gathering pace. One of the most recent launches was from F&C, which claims its UK Enhanced Alpha fund is the first 130/30 fund investing in British equities. UBS also offers 130/30 funds, but investing in US equities, and JP Morgan has products investing in Europe and the US. Now 130/30 mania has started, there's more to come. High-risk funds But there's a worry that if more such funds are launched, they could be jumping on a bandwagon with managers that don't have the skills to make them work. "Companies with good hedge fund capabilities and experience of using the tools should do alright," says Haynes. But Justin Modray warns that you have to take extra care when selecting your manager. "The shorting facility lets the manager put more money in stocks he likes, but if these go wrong you can lose a lot of money." Going short presents managers with a different challenge - they will have to know as much about companies they don't want to invest in as those they do. Hughes adds that this means these funds can be a lot riskier than the investment houses would have you believe. "If the fund is borrowing and the long side and short side go wrong, the problems will be magnified," he says. "So they are only suitable if you've already got a large, diversified portfolio and a high risk appetite." Haynes agrees. "Only consider 130/30 funds if you already have a diverse range of traditional equity funds, and wait until you can see a track record of performance in different investment climates." More funds taking advantage of flexible new rules and labelled as being new and innovative will pop up in the coming months. But with very little performance data to judge them on, the jury is currently still out. One thing that many experts appear to agree on, however, is that products such as absolute return and 130/30 funds are more a marketing creation than the answer to your investment prayers.
|
||||||||||||||||
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View