Time for Caution: Polar Capital UK Absolute Equity

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Time for Caution: Polar Capital UK Absolute Equity

The most popular area of the market in recent weeks has been the Targeted Absolute Return sector with £243m of net retail sales in February and £485m in March. This was in sharp contrast to the massive £682m outflow from UK All Companies funds and reflects a general air of investor caution.

There are 75 Targeted Absolute Return funds, but between them they have generated a disappointing average one year loss of 0.2%. Only four have made a return of more than 10% over the past 12 months, with the best being Polar Capital UK Absolute Equity with an impressive gain of 21.9%.

The Polar fund was launched in September 2014 and is still really small with just £36.4m in assets under management. It is run by Guy Rushton who aims to achieve a positive absolute return on a 12-month rolling basis by investing mainly in UK equities and to a lesser degree in European and global stocks.

Rushton looks at the company fundamentals to try to identify inflection points in the corporate prospects. At the end of March he had invested in 57 different holdings of which 34 were long and 23 short. The latter allow him to profit from falling prices and to hedge out part of the market exposure.

It is an interesting portfolio with the UK element having a long weighting of 66.2%, which after netting off the shorts of 43.9% reduces the net exposure to 22.4%. The largest long positions include the photo kiosk operator Photo-Me International and AIM-listed litigation finance provider Burford Capital. Shares in the latter rose 30% in March after the release of a strong set of results.

There is also a significant long allocation to the US and Canada that adds a further 16.8% net exposure. This includes important weightings in the gold producers Agnico Eagle Mines and Detour Gold Corp. The remaining 3.6% of net exposure – that brings the total up to 40.3% − is to European companies.

Rushton’s three largest sector weightings are Materials, Financials and Technology, with net exposures of 13.1% to 14.9%. His main underweight is Industrials with a net short of 5.9%.

The best long-term performer in the sector is City Financial Absolute Equity with an incredible 5-year gain of 106.7%, although the recent returns have tailed off a bit. I wrote about it in February as the fund making money in turbulent markets.

Long-short funds like these have the potential to generate better risk-adjusted returns than a long only equivalent because the managers can make money from rising and falling prices, while also hedging out some of the market risk.

One of the best ways to assess their performance is to look at the Sharpe Ratio, which is calculated by dividing the average daily return of the fund by the standard deviation of the daily returns measured over the same period. This provides an indication of the value added by the manager per unit of risk.

The Sharpe Ratio of the Polar Capital fund is an impressive 1.72 measured over 1 year, while the 3-year figure for the City Financial fund is 1.34. They could both be decent options if the markets continue to waver.


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