Lots of people are nervous about the prospects for the markets going into 2016 because of the threat of higher interest rates in the US and UK and the risk of a further slowdown in China. Investors who are uncomfortable with the outlook might want to consider a targeted absolute return fund.
A good example is Smith & Williamson Enterprise, which aims to achieve positive returns on a rolling 12-month basis with low risk of a capital loss and low volatility. It targets an annual return of 8% to 10% by holding long and short positions in UK stocks. This enables the managers to make money both from rising and falling share prices without being 100% exposed to the market.
A short position is where the fund uses a derivative called a CFD to sell a stock that it doesn’t own. This results in an obligation to buy it back later, which would generate a profit if the share price falls. In November, two of the companies that the managers had shorted issued profit warnings with both contributing to the positive performance for the month.
It is an interesting portfolio with 33 short positions and 55 longs. The largest long positions are in companies such as Vodafone, ITV, Dixons Carphone, Prudential and ARM with weightings of between 1.9% and 2.3%. The biggest net sector exposures are to Technology, Telecoms and Healthcare, although the overall net exposure to the market is just 21%.
The returns from a long-short fund depend mainly on the skill of the managers in picking which stocks to go long and short in. If they get it right they can profit from price movements in both directions – but if they get it wrong they can lose on both sides.
Smith & Williamson Enterprise was launched in January 2010 and has attracted £117.4m in assets under management. In the five completed years it has returned -8.8%, 7.4%, 11.5%, 8.3% and 3% with only 2010 generating a loss. Overall it is up 22% with ongoing charges of 1.58% and a performance fee of 10% subject to a high water mark.
The last five years have been a decent time to be invested in the UK stock market with the FTSE All-Share index generating a total return of about 30%. A long-short fund will often fail to keep pace when share prices rise strongly, but will typically make up for it when the index struggles. If 2016 turns out to be as challenging as many believe, Smith & Williamson Enterprise could turn out to be a decent low-risk option.