Cazenove UK Absolute Target Class P1 Acc

The Cazenove UK Absolute Target Fund is a powerful tool for investors looking to build a balanced portfolio aiming to weather the worst of any market storms. This new ‘absolute return’ fund aims to deliver a positive return in all market conditions; when the market rises and when it falls.

Most managers are able to generate returns in a rising market but it requires a whole different set of skills to profit from a falling market. Tim Russell is an expert in this area. He has managed a similar fund for Cazenove for many years with excellent results, but this fund is only available to institutional investors. With the launch of the UK Absolute Target Fund the public now have access to his talent in this area.

So how does this fund work? As well as buying shares Tim Russell believes will rise in value, it also uses a sophisticated investment technique known as shorting (see below for an explanation) which enables him to profit when markets or stocks fall, providing he makes the right decision. Essentially this fund looks to out perform the returns from cash in any market, although unlike cash the value of this investment could fall as well as rise.

This fund could fit into almost any investor’s portfolio. It could form the core of a portfolio, around which investors could build a portfolio of more adventurous funds, or it could be worth considering if you are approaching, or in, retirement and looking to lower the volatility in your portfolio.

It is worth noting that the Cazenove UK Absolute Target Fund carries a performance fee of 20% on any positive returns. A ‘high watermark’ will apply, meaning that the fee will only be charged if the unit price is at an all-time high. We do not like the industry trend towards charging performance fees. However, in our opinion Tim Russell and the team at Cazenove should do a superb job for their investors, which goes some way towards justifying this fee.

We are delighted to see this new launch from Cazenove as there has been a shortage of quality managers running this type of fund. You may have seen us highlight the BlackRock UK Absolute Alpha Fund in the past. The new Cazenove fund is similar in many ways so now investors have a choice of quality managers operating in this area. In our opinion absolute return funds should not be held in isolation. In fact to spread risk and create diversification it may be sensible to spread your portfolio across a selection of funds.

In our opinion Tim Russell is a top class manager with the skills to succeed in this specialised investment area. We believe the Cazenove UK Absolute Target Fund would be an excellent long term choice for investors looking to reduce the potential for volatility while making sure their money keeps working for them.

SHORTING - AN EXPLANATION

Traditionally investors buy assets they believe will rise in value. Shorting is different.

The principle is that the fund manager actually sells shares they don’t own. This in effect means he owes the buyer the shares. The buyer agrees they will not take delivery of the shares for, say, six months and the fund manager hopes that by then the share price will have fallen. After six months the fund manager purchases the shares in the market and passes them on to his buyer. The difference between the two prices is the profit or loss. For example:

1. Fund manager sells short 10,000 shares at £2 each = £20,000
2. Purchase these shares six months later at 80p each = £8,000
3. Profit = £12,000

In this example had the share price risen by the same amount, it would have cost the manager more to purchase the shares than they made from selling them and they would have made a £12,000 loss. There are many ways of effecting this investment strategy and Cazenove short by entering into contracts with a broker and do not actually take delivery of the shares. Therefore this is not an exact description of how it happens, and ignores transaction and other costs, but it hopefully explains the principle.