UK equities have trended sideways in 2014, with the FTSE All Share up just 2.98 per cent after a spurt in the last few weeks.
Analysts and fund buyers foresaw this type of market and told FE Trustnet that long/short funds would best be able to cope with it, but our data suggests that this is only true in some cases.
Top-rated funds from Odey, Schroders and BlackRock following a long/short strategy have lost money this year, while funds from City Financial, Henderson and Old Mutual have prospered.
Many of the funds that have struggled this year were caught out in the market sell-off that began in March.
Performance of funds vs index in 2014
Source: FE Analytics
This is concerning for those who buy this type of fund for its diversification benefits. Long/short funds are often bought to provide gains irrespective of market conditions.
The idea is that by being able to short stocks as well as buy them the fund can provide returns when the overall market is declining.
Funds falling when the overall market falls suggests they are more exposed to their long book than their short book and therefore act more like a straight equity portfolio.
The £940m CF Odey Absolute Fund has suffered this year, losing 1.81 per cent. This comes after a year in which the fund saw huge inflows as it was making market–leading returns.
It was up 45.02 per cent in 2013, more than any other fund in the IMA Targeted Absolute Return fund sector, and this strong performance led to hefty inflows – roughly £230m over the past 12 months according to our figures.
BlackRock UK Absolute Alpha has lost 2.3 per cent over the same period and Schroder UK Absolute Target 2.67 per cent. Schroder Absolute UK Dynamic has lost 4.27 per cent.
All of Odey Asset Management’s portfolios have struggled this year, our data shows, suggesting that stock selection has been an issue.
Performance of Odey funds in 2014
Source: FE Analytics
Sky Deutshland, which makes up 7 per cent of the absolute return fund and 6.6 per cent of the Odey Opus fund as well as 2.1 per cent of the CF Odey Portfolio, is down 16.1 per cent year-to-date.
Odey is the largest minority shareholder in the company and has expressed his displeasure at the bid for the company by BskyB, saying that the “nil premium” approach massively undervalued the company.
Falls of just under 10 per cent in Regus, which makes up 7.4 per cent of the absolute return fund have also not helped.
As this suggests, the Odey managers take very punchy stock bets which can cause the funds to suffer when these stocks are out of favour.
There has been some selling of winners in the FTSE 250 this year which has harmed stocks such as Regus and Sports Direct, another Odey position, albeit not in the fund in question.
According to the fund’s latest factsheet its net equity exposure is positive at around 30 per cent.
The net exposure on the Schroder Absolute UK Dynamic fund is a little higher at 42.6 per cent.
It is another to have suffered in the market sell-off since March, according to our data, and is now behind the equity index on a one year view.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
The fund focuses on the smaller end of the market where FE Alpha Manager Paul Marriage has his expertise, and this sector has suffered in recent weeks as growth areas sell-off.
Top 10 long positions Xaar and WANDisco, both tech stocks, are down 31.7 per cent and 51.42 per cent respectively having both seen big gains in 2013.
The £250m BlackRock Uk Alpha fund is more balanced in its profile, having a net long position of just 15 per cent. Despite this it is another to have slumped following the FTSE’s correction in March
The £61.4m City Financial UK Equity fund, run by David Crawford, has had a much more successful year, returning 16.03 per cent.
The fund has a beta of just -0.03 but is heavily long at around 67 per cent next exposure.
It has done very well out of a short in ASOS, worth 4.82 per cent of the fund, which has lost 31.88 per cent this year.
Crawford says that a rational price for ASIS would be around £18, 60 per cent down from their current price.
The fund managed to make a positive return of 3.9 per cent in April as the market fell 3 per cent. This is despite a long position in Cairn Energy worth 8.95 per cent of the fund which has lost 32.41 per cent so far this year. Crawford says he expects a 70 per cent uplift to the stock’s price.
Henderson European Absolute Return, which as five FE crowns, has made 5.47 per cent this year, while Old Mutual Global Equity Absolute Return has made 4.42 per cent.
Our data shows that the macro and multi asset strategies have performed well in a period of stress, with the Invesco perpetual Global Targeted Returns fund up 3.31 per cent and the Insight Global Absolute Return fund up 2.53 per cent.
Newton Real Return has also produced top quartile returns after a year in the bottom quartile.
Standard Life GARS has had a more difficult time, however, with third quartile returns of 0.55 per cent.
The management team outlined some of their current strategies in a recent FE Trustnet article.
Click here to learn more about absolute return investment strategies, with the FE Trustnet guide to absolute return.