The $577m fund is headed up by the management trio of Ian Heslop, Mike Servent and Amadeo Alentorn who also run numerous global equity portfolios such as Old Mutual’s North American, Japan and Asia funds.
Metcalfe doesn’t uses the fund as an out-and-out absolute return fund, but more to dampen his other global funds’ volatility. However, he also likes it because during periods of severe market stress it has proven to have low correlation to both global equity and fixed income markets.
Because of that, Metcalfe says that it is a perfect holding for any investor, no matter what their attitude to risk is.
“We are not holding this fund looking for negative correlation with equities, but it is there to give a degree of downside protection versus a completely long only global equity position,” he said.
“We feel, therefore, that it is suitable as a constituent in all the different risk rating portfolios.”
The $577m fund, which sits in the Offshore Mutual universe but is freely available to UK investors, was launched in June 2009.
According to FE Analytics, Old Mutual Global Equity Absolute Return has delivered a positive return in each discrete calendar year since its launch, including the six month period between June 2009 and January 2010 and so far in 2014.
Source: FE Analytics
On a cumulative basis, that means the fund has returned 42.7 per cent since its launch.
While that is much lower than the average long-only IMA Global fund, as the graph below shows, it has been close to three times less volatile and its maximum drawdown has also been three times less than that of the sector.
Performance of fund versus sector since June 2009
Source: FE Analytics
Given that Heslop, Servent and Alentorn only invest in equities, Metcalfe describes the Old Mutual Global Equity Absolute Return as a much more “punchy” offering than some of the funds in the IMA Targeted Absolute Return sector.
However, he says it is useful for cautious and balanced investors as it does protect on the downside, and has tended to deliver decent returns when markets have rallied. Despite that, he says more aggressive investors shouldn’t avoid it either.
The major reason for that is, like a number of industry experts, Metcalfe is concerned about the short term outlook for risk assets.
“We are becoming increasingly cautious about valuation levels of many of the developed markets,” Metcalfe said.
“There will always be plenty of people around to justify elevated stock prices and people who will disagree that the prices are actually elevated at all.”
“In our view there is precisely nobody who truly knows what happen will happen to asset prices as all the factors around QE unwind, if indeed they do all unwind.”
“The fund can be used for higher risk investors because just because an investor is higher risk, it doesn’t mean they want to throw their money away. It’s interesting because it isn’t very often that you can find a fund that suits both high and low risk investors.”
One of the aspects that Metcalfe particularly likes about the Old Mutual Global Equity Absolute Return fund is that during periods of severe market stress, the fund has had very low correlation to both bonds and equities.
An example of that was during last year’s infamous “taper tantrum”, when former Fed chairman Ben Bernanke warned the market that he was considering reducing his quantitative easing programme.
The announcement caused a correction in both equities and bonds but, as a FE Trustnet article recently highlighted, a large number of IMA Targeted Absolute Return funds also struggled to protect their investors.
However, as the graph below shows, Old Mutual Global Equity Absolute Return managed to deliver a positive return, regardless of the pan-asset class sell-off.
Performance of fund versus sectors between May 2013 and June 2013
Source: FE Analytics
Its performance during last year’s sell-off and other past market corrections was one of the principal reasons Metcalfe chose the Old Mutual fund over others in the space.
“We did look at all the funds in the targeted absolute return sector but many were still too correlated with the IMA Global sector,” Metcalfe said.
“In particular, Newton Real Return and Standard Life GARS did not bring enough diversification within different market conditions when put up against the Old Mutual fund, but it really depends on what you are looking for from a fund, rather than one being necessarily better than another.”
The Old Mutual fund’s absolute return horizon is over any rolling 12 month period and the managers try to deliver returns which have a low correlation to both bonds and equities, which they try to achieve via various market neutral trades.
Heslop, Servent and Alentorn currently have 355 positions in their long book and 353 in their short book.
Their net long sector positions include healthcare, utilities, industrials, telecoms and technology while they are currently net short energy, consumer discretionary, financials, consumer staples and basic materials.
Old Mutual Global Equity Absolute Return, which is domiciled in Ireland, has an ongoing charges figure (OCF) of 0.99 per cent and is available on a number of fund platforms.
