Closed ended absolute returns

Finding an investment trust run for absolute returns needs some careful checking, as there is no particular sector the trusts live in and they are scattered through the geographical and market cap sectors of the investment trust world. A number of trusts are run with a stated absolute returns remit however. Gervais Williams, manager of the Gartmore Growth Opportunities trust, defines an absolute returns trust as one which uses shorting methods.

“Technically we’re a hybrid because we are looking at long only returns a large part of the time, but in times of uncertainty we’re willing to protect the downside with things like options and cash,” says Williams

His current shorting strategy consists of put options on the FTSE 100 through until September next year. These should retain some client money if Williams’ investments in small and micro cap companies don’t make the money he expects them to.

At Invesco Perpetual manager of the European Absolute Return trust, John Surplice, aims for a target return of Libor plus 2%. Unlike many of its open-ended fund cousins, the trust has achieved this aim over recent years. Surplice uses bonds, cash and European equities to achieve his aims.

“We exploit market opportunities but broadly we’re fairly defensive,” he explains.

“One of the advantages of an absolute return strategy is that if you don’t like what you see in one are you can just go away and look for returns elsewhere.”

The closed-ended structure of the investment trust also lends itself well to absolute returns, allowing managers to adopt longer term strategies.

James Hart co-manages the Cayenne trust and the offshore Apollo fund plc at absolute return specialists Cayenne Asset Management.

“When markets are weak you suffer redemptions in an open-ended fund,” he explains, “which means you have to sell into a falling market. The closed-ended structure avoids that problem and enables you to take longer-term investment decisions.”

This investment freedom lives alongside the freedom from chasing benchmark returns, according to Surplice, to allow for more consistent performance.

“Not comparing yourself to an equity benchmark means I’m not thinking - must do 11% compared to equities’ 10%,” he explains.

And the strategy has proven consistent in its aim of reducing volatility. Surplice’s returns have been equivalent to two thirds of the equity market over the last couple of years with less volatility.

“That’s where some of the funds purporting to be absolute return haven’t done such a great job,” he adds. “They haven’t avoided the volatility.”

While they try to avoid volatility, neither the Gartmore nor the Cayenne trust have a stated return policy – unlike the Invesco trust. Williams states his aim as being one of the premium trusts in the sector with regard to returns, while Hart hopes for Cayenne to make around 14% per annum similar to his Apollo fund. The Cayenne trust was previously run by Invesco Perpetual and was awarded to Cayenne on the basis of their absolute returns strategy and Apollo’s sucess.


1 November 2007