Uncertainty over the direction of UK and US interest rates and the Chinese economy means the market volatility that we have seen over the past couple of months may continue. If you wish to protect your portfolio, consider absolute-return funds, which have recently helped Whitechurch Securities' portfolios weather the China crisis.
- Good performance
- Relatively low volatility
- Reasonable ongoing charge
- Experienced managers
- Performance fee
"A number of the funds we use in this space made money in these conditions," say analysts at Whitechurch. "Absolute-return strategies remain an integral part of our investment portfolios, increasing diversification and reducing volatility."
A good option could be Henderson UK Absolute Return Fund (GB00B5KKCX12) which we recently added to the IC Top 100 Funds. This fund aims for a positive return over the long term, whether markets go up or down, by investing in UK shares mainly in the FTSE 100. It also goes short on them - bets on their share price falling - as profiting from declining share prices provides the potential to generate absolute returns or preserve capital in adverse markets.
The trust has made good cumulative total returns, beating the FTSE 100 and the sector average for the Investment Association Global Targeted Return sector over one, three and five years. Another of the fund's aims is to deliver absolute (more than zero) returns every year and it has managed to do this from 2010 to 2014, with the exception of 2011 when it delivered around 0 per cent - albeit more than its sector average and broad UK equity indices.
The fund's managers, Ben Wallace and Luke Newman, look for stocks that will exceed or fall short of analysts' expectations in choosing what to invest in or what to short. Two-thirds of the portfolio is in shorter-term tactical ideas, where the managers believe an earnings surprise could be imminent. The remainder is in core holdings, where the managers think there are long-term drivers that will increase or decrease the share price over time.
The fund has limits on overall market exposure, which can help reduce its volatility, and it also uses derivatives.
"While the fund was only launched in 2009, the strategy and the team have a 10-year track record running another identical mandate," say analysts at research company FundCalibre. "During that period the returns have been remarkably consistent. Unlike many of its sector peers, this fund has achieved its stated aim, which is to provide equity-like performance but with one-third the volatility."
The fund's performance is driven by the manager's stockpicking skills so when it is highly correlated to the market the performance could suffer if the wider macroeconomic environment is doing badly. While derivatives can benefit performance, if the managers make the wrong call with these it can detract from performance, so they are an added risk.
The fund also charges a performance fee of 20 per cent relative to a hurdle rate and high water mark.
However, the fund has proven itself in difficult periods such as 2011 when it managed not to lose anything in contrast to broad UK indices and its peer group average. Its managers also have a long track record of running this kind of strategy using tools such as derivatives.
And despite the performance fee it can still be picked up on platforms for a reasonable ongoing charge of 1.07 per cent.
So with uncertain markets ahead, if you want to build some protection into your portfolio Henderson UK Absolute Return Fund looks like a good option. Buy.
HENDERSON UK ABSOLUTE RETURN (GB00B5KKCX12) | |||
---|---|---|---|
PRICE | 154.2p | MEAN RETURN | 9.94% |
IMA SECTOR | Targeted Absolute Return | SHARPE RATIO | 2.36 |
FUND TYPE | Open Ended Investment Company | STANDARD DEVIATION | 3.81% |
FUND SIZE | £738.6m | ONGOING CHARGE | 1.07% |
SET UP DATE | 14 April 2009 | YIELD | 0.5% |
MANAGER START DATE | 2009* | MORE DETAILS | www.henderson.com |
Source: Morningstar, *Henderson
Performance
1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | |
---|---|---|---|
Henderson UK Absolute Return I Acc | 8.1 | 32.8 | 38.5 |
FTSE 100 TR GBP | 0.1 | 19.5 | 33.8 |
FTSE All Share TR GBP | 2.6 | 24.9 | 41.1 |
Source: Morningstar as at 5 October 2015
Annual returns (%)
2010 | 2011 | 2012 | 2013 | 2014 | |
---|---|---|---|---|---|
Henderson UK Absolute Return I Acc | 4.1 | 0.1 | 4.8 | 17.6 | 5.1 |
FTSE 100 TR GBP | 12.6 | -2.2 | 10.0 | 18.7 | 0.7 |
FTSE All Share TR GBP | 14.5 | -3.5 | 12.3 | 20.8 | 1.2 |
Source: Morningstar as at 5 October 2015
Top five investments as at 31 August 2015 (%)
RELX | 3.3 |
Aviva | 2.80 |
Informa | 2.60 |
Legal & General | 2.60 |
Imperial Tobacco | 1.6 |
Long stock positions | 97 |
Short stock positions | 48 |
Net market exposure | 35.9% |
Gross market exposure | 82.7% |
Source: Henderson as at 31 August 2015