This spring, the credit crunch has reduced many fund managers to watching tumbling equity prices pummel their portfolios. In the past year, only 23% of funds have made money and just one in ten did better than a typical savings account. With the FTSE 100 down 8% since early January, the current economic climate looks set to stay tricky for some time for most fund managers.
Fortunately, this is the kind of equity volatility so-called “130/30” funds are designed to tackle. Marketed as “hedge funds for the man on the street”, they invest in two directions, long and short, so they should profit from rising or falling prices.
In principle, a fund manager might start with £100 from investors, as with a conventional fund, but then sell £30 of borrowed shares as a bet on falling prices and invest the proceeds, plus the original £100, in £130 of equities. The overall fund net asset value is still £100 at that point, a “long” £130 up bet on certain equity prices rising, less a £30 “short” down bet on others falling.
Sounds clever, but as we predicted at their launch last year, they’re finding it hard to make money from either up or down bets. That’s because successfully shorting stocks – selling them in the hope of buying them back for less later – is as tricky as conventional stock-picking. It’s also risky if the shares rise, rather than fall, during the loan period and have to be repurchased at a premium.
Of the eight 130/30 funds launched last year, none has made money in the year to 14 March. With the exception of one fund, they did worse than their benchmarks, says Investment Week. Invesco Pan European 130/30 is down 14.8%, against 10.54% for its benchmark, followed by Resolution Cartesian UK Equity 130/30 with a 13.95% loss.
Thus 130/30s look to be something of a gimmick, designed to generate extra revenues, rather than being serious successors to more traditional long-only funds. Indeed, in a recent FTAdviser.com poll, 58% of participants said they believed 130/30 funds were launched primarily as a marketing ploy.
If you really want a fund manager to help you through the turbulence, some traditional funds have made the top 10% of their peer group every month for a decade. According to Hargreaves Lansdown, the UK equity income winner was the Jupiter Income fund, with a 137% return. For corporate bond funds, it’s Invesco Perpetual, with a 72% return. In Asia, the First State Asia Pacific fund has returned 345%; and the New Europe and Emerging Markets fund is up 224% over the past ten years.