"In the short term, there may be some restriction on our ability to create new synthetic short positions in certain stocks. However, we note that the FSA has confirmed that they view short selling as a legitimate financial technique, and believe that there will be no significant impact on the long term ability of the Fund to achieve its investment objective."
The concern however is whether the shorting restrictions will last only till the current January 2009 deadline.
Peter McGahan, managing director of Worldwide Financial Planning warns: “Absolute returns are banking on if they want to short banks they will do so after the delay. But what happens if the government says no, you can’t do them full stop? Or even says you cannot short any Blue Chip UK funds? What is going to happen to these funds especially if at that point to close all these positions they have got? It is a strategy advisers need to understand, the shorting process is a high-risk process.”
It is often said that it is impossible to compare absolute return funds with other funds, something, which would of course be useful in advising where else clients might want to put their money.
But as of 29 September, the Absolute Return funds sector was showing a monthly cumulative return of –1.4%, beaten only by the Money Markets sector with –0.1% and UK Gilts with –1.2%. Over one year the Absolute Return funds sector still returned a positive 0.9% behind Money Markets 3.3%, UK Gilts 5%, Global Bonds 5.8% and UK Index Linked Gilts with 9.2%.
True enough then while absolute return funds are no alternative to a cash or gilt fund in McGahan’s view, there is some recent historic claim to their beating other mainstream fund sectors. But as for going forward, time will have to tell.
“Gilt funds are okay and any sort of fixed interest between now and the middle of next year should be gilts based,” says McGahan, “because they are secure and if interest rates come down they should start to perform and cash of course is fine as we speak because there is quite a bit of volatility around.”
Within the absolute return funds sector favourites for advisers and top of the sector are still Threadneedle Absolute Return, which has posted one-year returns of 8.8% and Black Rock UK Absolute Alpha which has produced 8.5%.
Tony Larkins, managing director of Beacon Financial says: “I have held fire a little on absolute funds anyway. Black Rock has been going up and up and although it has stated going down it is only by a couple of percent in terms of the market so it is good compared with everything else across the board.”
However he says clients may still be thinking they could be better off sitting in cash.
“It depends how long clients are going to be invested in the fund. If you are putting a portfolio together for somebody and they are going to sit in those funds for a long time absolute returns perhaps should be part of the portfolio, depending on what the overall risk is. But if you are managing those funds or moving them around on an ad hoc or regular basis then perhaps you might not going into something at this particular time you think might go down anyway.”
Advisers and clients would be advised to assess how much of a fund’s returns come from shorting positions, because then it is an added risk in that portfolio if there is a chance the shorting ban may be extended.
McGahan says: “These funds are relying on the ability to short and faced with a chance of the inability to short full stop they may well have lost their USP between them and a long only fund. Take the situation in Australia, where effectively every blue chip stock cannot be shorted – if that happened in the UK, Black Rock Absolute Alpha wouldn’t be able to call it a UK Absolute Alpha fund because it wouldn’t be able to achieve its returns without the ability to short.”