Your flexible fund

Many people expected that the new rules governing investment funds, known as UCITS III, which came into force in April 2004, would lead to many equity fund managers making use of the greater flexibility they offered

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In particular it was expected that these managers would be eager to take advantage of the ability to hold more of their funds in cash, or even engage in short selling - a technique which allows investors to make money when shares fall.
In this way they could hope to mitigate some of the losses normally sustained by equity funds in falling markets and run their funds on an absolute return basis, which means making money for investors in good times and bad.
But so far, to many investors’ surprise, only one equity fund has taken the plunge and embraced the total return idea. That is the Black Rock UK Absolute Alpha fund, run by Mark Lyttleton.
Mr Lyttleton says: “Our total return approach means we tend to do better than conventional equity funds in falling markets but underperform them in rising markets. In other words we offer investors a smoother, if less spectacular, ride.”
So far the fund has done what it says on the tin. Since its launch in April 2005 it has produced a return of 26.8 per cent, compared with an average return of 50.9 per cent for UK equity funds. Not surprisingly it has lagged other equity funds in a rising market.
But in the stock market shakeout of May 2006 the Absolute Alpha fund showed its worth. It actually rose slightly in value while equity funds fell by an average of about 5 per cent.
Mr Lyttleton says: “After four years of rising stock markets people may be starting to conclude that they won’t go up forever and that putting some money into a fund such as ours would be a useful hedge against any future downturn.”
So why have other financial groups so far not seized the opportunity to offer investors a similar fund? Because, says Mr Lyttleton, it is expensive to set up and there are a lot of hurdles to jump in the form of regulation, compliance and risk controls.  They may also be waiting to see if the Black Rock fund proves a success before coming up with a version of their own.
So far it has done pretty well, pulling in £170 million of investors’ money, even before reaching the critical point where it can boast a three-year track record  - the minimum that many financial advisers require before they will consider recommending a fund.