Funds Centre

SVM UK Absolute Alpha - new fund launch

It has been a difficult period for many traditional investments over the last 18 months as the financial crisis has deepened. Many investors are now seeking investments that can deliver positive returns against a difficult backdrop, which is why absolute

return funds are becoming increasingly popular; they aim to deliver positive returns regardless of market conditions.The new SVM UK Absolute Alpha Fund looks to deliver cash beating returns over 12 months whilst avoiding the worst of any market volatility. It is not a substitute for cash as it will be invested in the UK stock market. It can therefore fall in value as well as rise over shorter periods so a long term horizon is necessary.The manager, Colin McLean looks to profit from successful companies, as well as those that are struggling. This latter strategy is known as ‘shorting’ where a fund manager sells shares he doesn’t own with the intention of buying them back at a lower price at a later date, thereby making a profit. Traditional funds generally buy into shares on the expectation they will rise in value – this can be referred to as ‘long’ positions in companies.If a lot of companies are suffering from deteriorating trading conditions, this fund is likely to have a bias to the ‘shorts’. The reverse is likely to be true and the fund could have a bias to the ‘long’ positions if Colin McLean is more positive. This flexibility allows him to take advantage of good or bad market conditions, but means that returns are purely dependant on the manager’s skill and not a rising market.Trying to profit from shares that fall in value requires a particular skill and Colin McLean has demonstrated this successfully on an existing fund (not currently available to private investors), although past performance is not necessarily a guide to the future. While the strategy is expected to lower volatility compared to traditional UK equity funds, its application of alternative investment techniques can make it a higher risk fund. There may also be times when the market rallies strongly and this fund could underperform.This fund has a performance fee, which in general we do not like, although we treat each fund on a case by case basis. The fund has an annual charge of 1.5% plus a performance fee of 20% on returns in excess of the 3 month sterling LIBOR (London Inter-Bank Offered Rate). This is the interest rate at which banks borrow money from the wholesale market. This rate is currently around 2% which at the present time is not a high performance target for the fund although when these rates rise, so will the fund’s performance target.Colin McLean has demonstrated an excellent track record managing a fund of this nature. We believe the overall strategy could reward long term investors and can complement more traditional UK equity funds. We have high hopes for the fund’s long term prospects and we believe it merits a place on the Wealth 150 list of our favourite funds in each sector.Meera Patel, Senior Analyst> Key Features of the SVM UK Absolute Alpha Fund