Wednesday, October 15, 2008

Absolute Return Fund (GARS Fund)

There's a new 'breed' of investment fund in town and it may be worthwhile to have a more in-depth look at the mechanics of it. The investment strategy that it adopts is akin to a hybrid of a Diversified Asset and Hedge Fund. The current offering from Standard Life has effectively made this type of fund available to the regular investor, without the stipulation of an excessive minimum investment.

The fund holds a broader range of asset classes, insofar as it includes your typical (equities,bonds and property) assets but also uses Derivatives to implement alternative investment strategies in a variety of market conditions.

The success of this type of strategy is broadly dependent on the skills of the fund managers in getting the mix of asset selection and investment strategies correct over time. It is anticipated that the Volatility Rating of this type of fund will be much lower than equity based funds, such as Managed or Consensus.

The relative performance of your typical Actively Managed Fund is measured by linking it to a benchmark Index or Consensus type Fund. The Absolute Return Fund has a Targeted Positive Return. The current, ambitious, target is the 6 month Euribor (currently 5.36%) + 5% (over a rolling 3 year period), Gross of fees (AMC 1.35%pa). Do bear in mind that the Euribor is 'inflated' under current market conditions.

Unlike the typical Hedge Fund, there are no out-performance fees but there are no 'penalties' imposed on the managers for not achieving the target either. Also, it does not borrow cash to invest in the fund.

It is my opinion that this type of fund would be a welcome addition to most investor portfolios. Given the relatively low volatility rating, this may be especially true for Trustees of Pension Schemes. As the fund is priced on a daily basis, it is more liquid than a managed fund that would have exposure to real property. This is important, as the fund manager should not impose waiting periods on redemptions. All things considered, the annual management charge is competitive @ 1.35%pa.

See Glossary for definition of terms.

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