130/30 funds were the hot investment topic of late 2007 and early 2008. This was perhaps the worst time to be launching any type of equity vehicle, but particularly one that relied on a message of leveraging skilled stockpicking to boost returns.
The markets were making monkeys of the best stockpickers. The funds sold badly and little has been said of them since. Do they have a place?
The funds aimed to meld the liquidity and risk controls of a traditional equity fund with hedge fund techniques that enable fund managers to profit from a fall in a company’s share price. The theory went that a manager would use CFDs (contracts for differences) to take short exposure of up to 30% of the portfolio value and then use the funds created to take additional long positions in favoured stocks. The overall exposure is therefore 130% long and 30% short of the market. 130/30 was thought to be the optimum level of long and short exposure for outperformance.
The funds had been a huge hit in America. According to figures from JP Morgan, the strategy had attracted about $50 billion (£31 billion) in the three years to 2008. Threadneedle, JPMorgan Asset Management and UBS launched products. But the sector apparently had little natural appeal to British investors and failed to gain traction in the British market. Funds attracted relatively few assets and appeared to have their thunder stolen by the launch of absolute return funds.
Other groups that were poised to launch in the sector abandoned their plans. Ignis ran a series of small funds with seed money for about a year and a half but found no appetite for the products among its clients. It is moving slowly into the absolute return space with its European Absolute Return fund and it is planning more launches.
However, for fund houses it was not a question simply of replacing 130/30 with absolute returns. The sector had other problems. They were launched at a bad time – late 2007 and early 2008. Investors were not interested in equity, particularly in what appeared to be a leveraged equity strategy. (article continues below)
Above all, 130/30 funds rely on skilled stockpicking, yet the environment of the past two to three years has not favoured stockpickers. There is increasing concern among active managers that markets have become all about risk on or risk off, with little differentiation between quality stocks.
Marcus Brookes, the head of multi-manager at Cazenove Capital Management, says it has been a difficult time for all buy-and-hold managers: “Investors have a risk on/ risk off book and it moves between the two on fears that are already well known in the market, such as banks going bust. It will take something significant to break that behaviour.”
Only one onshore fund is specifically labelled 130/30 – the UBS US 130/30 Equity fund. Performance has been unexciting. It has fallen 0.8% over three years and is 53rd out of 67 funds in the North America sector to 27 Oct, according to Trustnet. It is also relatively small at £44m.
“If a fund manager labels something 130/30, he is saying that he is really long-only but occasionally gets some short ideas”
Threadneedle has a range of onshore funds that take a more flexible approach than a pure 130/30 strategy. The American Extended Alpha fund, launched for Stephen Moore in 2007, has been a strong performer. It is up 20.5% over three years against a North America sector return of 4.7%. But its fund factsheet makes no mention of a 130/30 goal.
The Global Extended Alpha fund has also been a top performer since its launch in 2008, despite attracting just £6.8m in assets. Over one year it is up 23.8%, against a sector average of 11.5%. However, it too is not quite a 130/30 fund. Andrew Holliman, the fund manager, can go anywhere from 110/10 to 140/40, depending on his view on markets.
Offshore, JPMorgan Asset Management has a range of funds with European, global and US mandates. The US and global funds have both outperformed their wider sectors. Invesco has European and US 130/30 funds domiciled in Luxembourg. The European fund is slightly ahead of the wider sector. The US fund only has a one-year record and is 4.7 percentage points behind its sector over that period. In general, performance has neither proved as exciting as 130/30 supporters have suggested nor as risky as some naysayers predicted.
So do they still have a place? Gary Potter, joint head of multi-manager at Thames River Capital, says 130/30 was the first step in bringing the ability to profit from falling markets through short-selling to retail investors, but their message of alpha generation has been superseded by the stronger message about absolute return. “If we hadn’t had Ucits III, there might be more of these structures.”
However, he says there are problems with the structure. “If a fund manager labels something 130/30, he is saying that he is really long-only but occasionally gets some short ideas. In that case, why 130/30? Why not 110/ 10? Or 150/50? It is a tricky message.”
Adrian Lowcock, a senior adviser at Bestinvest, says absolute return has left the 130/30 structure behind. And while absolute return funds have sold well, the weak performance of some funds has not endeared investors to long/short investing generally. He adds: “These funds sit in the normal equity sectors and run as long/short portfolios with a long bias. They need to get the stockpicking right, and the environment has not been kind.”
There is a place for providing fund managers with the tools to maximise the benefit they derive from stockpicking. But unless it brings significant extra performance, it is not worth the risk. Also, if a stockpicker has skill, why impose limits? The better funds, such as Threadneedle, have been flexible in their approach.