Introduction
The fund, managed by Ben Wallace, looks to deliver positive returns in both rising and falling markets.
It does this by utilising a long short strategy which involves identifying stocks with the potential to both rise and fall in value.
The fund will buy and hold stocks expected to rise in the same manner as a traditional long only fund and will short sell stocks it expects to fall.
Short selling involves selling stocks the fund doesn’t actually own, with the hope of buying them later at a reduced price and thus make a profit.
While pure short selling isn’t allowed under the UCITS III regulations the fund adheres to, it is able to synthetically replicate it by making use of derivative instruments called contracts for difference.
Although the fund has a short track record, Wallace perfected this long short strategy managing a hedge fund at Gartmore based on the same principles, which was launched on 01 March 2005.
Performance since launch – 30 April 2009 to 31 March 2010
Style and Strategy
The fund operates a bottom up strategy based purely on the ability of Wallace to identify suitable stocks and takes little notice of broader economic and market trends.
The fund consists of two components; a core of long term holdings that are typically expected to provide large payoffs over a time period of a year or more makes up about a third of the fund, and the remaining two thirds is a tactical portfolio of positions that are expected to yield less but have much shorter time horizons of three months or less which are traded frequently to make gains in the short term.
In the core portfolio the fund manager buys stocks that will exceed earnings expectations, have strong management and in a market or sector with good medium term prospects; conversely the fund manager looks to short sell stocks which he thinks will fall short of earnings targets, have weak management and are in a struggling industry.
While Wallace is ultimately responsible for picking stocks he is supported by the UK equity team and draws on the other fund managers at Gartmore as well as their analyst team for investment ideas.
Holdings and Breakdowns – as of 28 February 2010
The fund is not benchmarked to any particular index and invests across a range of UK equities, although it has historically had a bias towards large cap stocks.
The long portion of the fund is invested in stocks and the short portion in derivatives.
The funds pure stock picking approach mean it may have very different sector concentrations from a broader market index.
What to Expect
Since launch in April 2009 the fund has displayed much lower levels of risk than the FTSE All Share index which best represents the market the fund invests in.
While the fund is focused on UK equities, it bears little resemblance to the market and has shown very low correlation to the index.
At the time of writing the fund has too short a track record on which to base any reasonable expectations, however it is possible to look at the Gartmore AlphaGen Octanis hedge fund, that Wallace runs using the same strategy, for clues to how the fund will perform.
While the two funds are not identical it at least proves the viability of the strategy and can give investors some insight into what to expect from the fund.
Here too there is far lower volatility than the index over three years, although it has been more volatile the IMA Absolute Return sector average.
The fund is even less correlated to the index, suggesting that this is a feature of the strategy and can be expected to persist into the future.
Suitability
The funds low volatility and steady returns make it particularly attractive to cautious investors, although the reduced market risk is replaced with the additional risks that come from a complex investment strategy that may not produce the same results in the future.
One of the most appealing aspects of the fund is its low correlation to both equities and bonds making ait a good option for investors seeking to diversify their portfolios.
AFI Comment
“We first looked at the fund at launch on the back of the strong performance of the AlphaGen Octanis hedge fund which has been running since 2005.
Having met with Ben Wallace at launch we were impressed by his strong sense of personal drive which together with a cool-headed pragmatism made us confident that he was well-suited to running long/short money.
Moreover, we also felt that the fund’s structure which combines core and tactical trading portfolios leaves the fund well positioned to deliver on its target returns throughout a range of market conditions.
Throughout the fund’s history the managers have captured a decent amount of positive equity movements while protecting on the downside, providing excellent risk-adjusted absolute returns.” – Stuart Fox, City Asset Management.