Gartmore has launched a Japan Absolute Return Fund with the aim of delivering positive returns regardless of market conditions over the longer term.
There has been an array of absolute return funds that have been launched in the last couple of years and this fund looks to profit from opportunities in the Japanese market. The Japanese market has been well known to have one great year of performance, only to disappoint in subsequent years. This fund therefore looks to profit from both the good years, and the bad years. When it looks to profit from companies that fall in value, it will do this through the use of shorting (please see below for an explanation). The success of this will depend on the manager’s ability to make the right decisions, although an absolute return is not guaranteed.
This fund is managed by John Stewart who has 18 years investment experience and he is supported by a team of four specialists. He has managed a fund with a similar strategy for nine years. The main focus is on larger companies and it will be a fairly diversified portfolio of around 100 holdings.
The portfolio holds a combination of long term ideas which have catalysts that the manager believes will drive up share prices over time; and short term tactical ideas that focus on specific events or companies that are simply mispriced because they are overlooked and are likely to be rerated.
Please note the fund has an annual charge of 1.5% and a performance fee of 20% in excess of the Bank of England Base Rate, which is currently 0.5%. On the whole, we do not like performance fees as we can argue any active manager should be able to deliver a positive return, and this target is hardly challenging in our view. Please refer to the full prospectus for full details of the performance fee. The prospectus also gives details of the other risks the fund is exposed to (page 82), these include the fact hat it is based in just one country and also that the movements of currencies will influence the returns investors receive.
While the manager has built a track record managing a fund along similar lines (which is not available to most private investors), one of the biggest issues we have with these funds is the performance fee. In some cases, it can be worth paying a premium for quality, but we believe the fee structure on this fund is particularly expensive and could significantly dilute returns over time. We would also like to see how this fund performs in the current uncertain economic environment. It is therefore not on the Wealth 150 list of our favourite funds in each sector at this time.
Key Features of the Gartmore Japan Absolute Return Fund
Prospectus for the Gartmore Japan Absolute Return Fund
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 managers may short by entering into contracts with a broker and 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.
There has been an array of absolute return funds that have been launched in the last couple of years and this fund looks to profit from opportunities in the Japanese market. The Japanese market has been well known to have one great year of performance, only to disappoint in subsequent years. This fund therefore looks to profit from both the good years, and the bad years. When it looks to profit from companies that fall in value, it will do this through the use of shorting (please see below for an explanation). The success of this will depend on the manager’s ability to make the right decisions, although an absolute return is not guaranteed.
This fund is managed by John Stewart who has 18 years investment experience and he is supported by a team of four specialists. He has managed a fund with a similar strategy for nine years. The main focus is on larger companies and it will be a fairly diversified portfolio of around 100 holdings.
The portfolio holds a combination of long term ideas which have catalysts that the manager believes will drive up share prices over time; and short term tactical ideas that focus on specific events or companies that are simply mispriced because they are overlooked and are likely to be rerated.
Please note the fund has an annual charge of 1.5% and a performance fee of 20% in excess of the Bank of England Base Rate, which is currently 0.5%. On the whole, we do not like performance fees as we can argue any active manager should be able to deliver a positive return, and this target is hardly challenging in our view. Please refer to the full prospectus for full details of the performance fee. The prospectus also gives details of the other risks the fund is exposed to (page 82), these include the fact hat it is based in just one country and also that the movements of currencies will influence the returns investors receive.
While the manager has built a track record managing a fund along similar lines (which is not available to most private investors), one of the biggest issues we have with these funds is the performance fee. In some cases, it can be worth paying a premium for quality, but we believe the fee structure on this fund is particularly expensive and could significantly dilute returns over time. We would also like to see how this fund performs in the current uncertain economic environment. It is therefore not on the Wealth 150 list of our favourite funds in each sector at this time.
Key Features of the Gartmore Japan Absolute Return Fund
Prospectus for the Gartmore Japan Absolute Return Fund
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 managers may short by entering into contracts with a broker and 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.
