Portfolio Adviser

rift ge focus during the ractices still viewed providing solid

Asset Management, says: “Stock lending is popular with ETFs because the money made through this practice can be used to top up their fees. Other investment funds can do it

too but the practice is definitely most popular among ETFs, a significant proportion of which do it.” If an investor is interested in ETFs, it is also worth being aware of the risks involved in stock lending even though it is not an approach individual investors can generally take themselves. “The main risk is not that the value of the stock either plummets or rises dramatically while it is lent out but rather that the company to which the ETF has lent a stock encounters problems during the transaction,” Parsons adds. “If, for example, an ETF lent a stock to Lehman Brothers two years ago, it would most likely still be waiting for its return now.”

l Absolute opportunity

If, on the other hand, an investor is keen to benefit from short selling, perhaps the best option is to invest in an absolute return fund. The first absolute return funds available to retail investors were launched about five years ago, so this is still a reasonably new concept. But more funds are being launched all the time, with HSBC currently planning to start

marketing European and Global Emerging Markets absolute return schemes. Generally designed to beat cash returns by between 3% and 4%, these funds have proved increasingly popular over the past couple of years. McDermott says: “In 2008, UK equities fell by about 30% and global equities plunged by about 40%, so the fact the BlackRock Absolute Alpha fund managed a 0% return for the year made it look very attractive in comparison.” Now, they are likely to appeal due to the low interest rate environment which is making it so hard for savers to find decent returns. McDermott adds: “With

VIEWPOINT STOCK LENDING/SHORT SELLING

DX Long-Short performance

40

30

20

% 10

0

-10

DX Long-Short (Equity)

-20 Feb’09 Apr Jun Source: Data Explorers

Top 10 absolute return funds by Morningstar rating and 3-year return

MAY 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER

Aug

Oct

Dec

Feb’10

Apr

the Bank of England base rate at just 0.5%, savers are often facing the prospect of negative returns once inflation and tax have been taken into account. But the BlackRock fund has returned 8.8% over the past 12 months, and 30% over the past five years. “With some equity investors also turning to absolute return funds to protect against over-valuation in the markets, it is not surprising funds of this kind are increasingly popular.” At present McDermott’s favourite absolute return funds are Jupiter Absolute Return, which was launched in December 2009 and is run by star manager Philip Gibbs, as well as the BlackRock Absolute Alpha scheme.

M’star Fund 1-year 3-year 3-year 3-year 3-year 3-year Launch Dom Curr Rating size (£m) chg (%) chg (%) Sharpe Sortino Alpha Beta date Newton Real Return £ ★★★★★ 1,214.39 16.5 9.78 0.56 0.93 5.24 0.7 31 Aug ’93 UK £ Marlborough ETF Absolute Return A ★★★★★ 20.35 7 3.03 -0.64 -0.67 -5.79 0.34 7 July ’05 UK £ Schroder ISF EM Debt Abs Ret A Acc ★★★★ 4,504.52 14.84 16.3 0.67 1.21 2.65 0.38 29 Aug ’97 Lux $ Schroder ISF Asian Bond A Acc ★★★ 913.72 4.69 10.71 0 -0.01 -4.55 0.74 16 Oct ’98 Lux $ Baring Abs Return Global Bond A Acc ★★★ 174 11.43 8.3 0.55 0.9 7 -0.18 15 Mar ’04 UK £ T’needle Absolute Return Bd Inst Grs £ ★★★ 616.03 3.72 8.3 1.14 2.08 2.38 0.16 24 Oct ’05 UK £ RWC Strategic Reserve B € ★★ 67.75 0.34 12.98 0.09 0.1 0.11 0.02 29 Dec ’06 Lux € BNY Mellon Evolution Global Alpha C € ★ 33.21 6.68 4.83 -0.8 -0.93 22 Sep ’06 Ire € SWIP Absolute Return Bond A Acc ★ 76.26 9.13 3.29 -0.65 -0.64 -7.51 -0.8 29 Jun ’06 UK £ Henderson Emg Mkt Debt Abs Ret I ★ 70.85 4.61 2.20 -0.61 -0.61 -11.76 0.58 1 July ’05 UK £

Source: Morningstar

With some equity investors also turning to absolute return funds to protect against over-valuation in the markets, it is not surprising funds [such as the BlackRock Absolute Alpha fund] are increasingly popular “ ” Darius McDermott, managing director, Chelsea Financial Services

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