Dexion Absolute rebounds after tough 2008

This London listed fund-of-hedge-funds targets annual returns of between 12-15 per cent over a 36-month period, independent of equity market direction, and low volatility.

The portfolio managers (Harris Associates) invest in a wide range of underlying hedge funds, which are diversified by style and manager. The investment strategy is based on an existing fund (Aurora LP) run by the managers. Harris Associates started managing fund-of-hedge-fund accounts in 1988 and had more than US $37.7bn of assets under management (at 31 December 2008).

The shares incorporate a discount floor mechanism: a continuation vote will be proposed if, in any rolling 12-month period, the shares have traded, on average, at a discount in excess of 5 per cent of the underlying net asset value (NAV) over the same period. If the resolution is not passed, the directors are required to put forward a special wind-up resolution or reconstruct Dexion Absolute.

Since inception, and up until February of this year, the UK shares had traded at an average premium to NAV of 1.19 per cent, whereas the other sector constituents were trading at an average discount of 2.55 per cent. However, after the collapse of Lehman Bros, the situation altered drastically: as global markets de-leveraged and the flight to cash (or near-cash) gathered momentum, the average discount to NAV widened right across the sector, which forced Dexion to undertake significant purchases of its own shares in an attempt to keep them level with NAV.

By March the company had either re-purchased or redeemed 147m UK shares, representing 20.5 per cent of the issued share capital, together with a further 56.5m shares from the other non-UK classes. These measures were only effective to a limited degree, and the widening NAV discount triggered continuation votes for all four share classes. Following this, Dexion's sterling shareholders voted 95.5 per cent in favour of continuation, while the minority US dollar, euro and Australian dollar holders opted to move to a run-off fund.

Despite the travails of the past few months, Daniel Boyce, research analyst at WINS Investment Trusts, believes that Dexion offers genuine value for investors: "After a difficult 2008, Dexion Absolute has rebounded strongly. The fund's NAV is up 14 per cent year to date, significantly outperforming its peer group, and has been achieved despite the underlying managers using little or no leverage. The fund has benefited from the investment manager, Aurora, correctly increasing the portfolio's exposure to credit strategies, which has been a big driver of performance. Dexion Absolute is currently trading on a discount of 23 per cent to its last published NAV. This is likely to narrow if the fund's recent strong performance continues This will also be supported by Dexion's buy-back policy and the expected tender offer for 10 per cent of the portfolio at the end of the year."

Source: Dexion Capital & Thomson Financial*

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