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As the Gartmore UK Absolute Return Fund celebrates its first anniversary, Fund Manager Ben Wallace explains how his investment strategy has achieved returns of 10% since launch.

The Gartmore UK Absolute Return Fund has just celebrated its first anniversary. Launched on 30 April 2009, it ended its first 12 months showing returns of 10%. “We looked to achieve double digit growth while taking as little risk as possible,” says co-manager Ben Wallace. “And that’s what we have done.”

Ben has been using an absolute return methodology since 2004, but the Gartmore UK Absolute Return Fund – which he co-manages with Luke Newman – was the first opportunity for retail investors to have access to this strategy.

He knew they were facing a new challenge at the time of launch. “Although we had a successful four year track record running this strategy for hedge investors, this was a new Fund. We were opening to a new investor base,” he recalls. “I hoped we could keep our performance going. We portrayed the Fund as aiming to provide relatively low volatility with solid returns, and we have done what it said on the tin.”

The absolute return concept aims to generate positive returns over the year, regardless of the overall direction of the market. The Fund can take both long and short positions (see “The language of absolute return”) and is generally around one third invested in long term core ideas. The balance is in actively traded short term ideas. Over its first year, the Fund was up in 10 months out of 12.

It is Ben and Luke’s robust stock picking strategy that has enabled them to achieve double digit returns, over what has been the most volatile period of their career. Here are a couple of examples where this strategy has produced winners over the past year.

One, over the last couple of months, has been RBS. “We saw the shares trading at a big discount to book value, because most analysts had the company making a significant loss in the next year,” Ben explains. “But looking at the results from Lloyds, Santander (Abbey) and Bradford & Bingley, whose shares had performed well, it seemed inconceivable that RBS could perform materially worse.” So it proved. Over the next two months RBS shares rose by some 40%.

The Fund had a long-standing position in Arriva, the bus and rail transport business, which came good. The firm has considerable assets in mainland Europe and has invested a lot in the business, but had never seen the full benefit. Finally, in April of this year, Deutsche Bahn made an agreed £1.58 billion offer for the company. “That was an example of us being patient,” Ben says. “We could see a lot of value there, and we knew it would come through at some point.”

Another long-held stock – one that was in the portfolio from the start – was Rolls-Royce, the aero engine maker. “Because of the long term nature of the business, it was clear to us that their cash flow was a lot better than the market was discounting. We were rewarded as the market realised the true cash dynamics of the business.” The shares are up 80% over the past year.

With a portfolio of around 60-100 holdings, there are no star holdings to drive all the returns. This means that returns, as well as risk, are managed throughout the Fund. And when something doesn’t work as well, there are stops in place.

The biggest down month (-1.2%) was February. The Fund had a long position in BT when the Pension Regulator raised “substantial concerns” over the company’s plan to cut its pension deficit. The shares fell 9% on fears that BT would have to cut its dividend to boost pension contributions. The Pension Regulator later relented, but by then the damage had been done. However, stop losses had kicked in to spare the Fund feeling the full effects of this fall.

“The same month, we took a bit of risk off the table over worries about Greece,” Ben reports. “The market bounced back quickly, but it cost us money. But that’s the way we operate. When there’s a volatility spike and we’re not sure where things are going, we first reach to take off risk. And we’re right 80% of the time.”

Ben believes the rest of 2010 will be an “interesting” time. Governments have to address their deficits and there will be upwards pressure on interest rates. “For companies that enjoyed a lot of the cyclical benefit of the rally, but have not invested in the business, the medium term sustainability of their cash flow is uncertain,” he says. “But there are a lot of UK corporates with strong balance sheets, who can self-fund growth and who are well positioned to grow whether GDP is positive or negative. It’s a question of identifying the long term winners.” The reality is that the Fund is designed to produce positive returns, no matter which way the markets are moving.

Edward Russell-Walling is a financial writer and editor.  His work has appeared in titles such as the Financial Times, The Times and The Banker.

Find out more about the Gartmore UK Absolute Return Fund

Source for performance: Lipper. Basis: mid to mid, net income reinvested, net of fees in sterling terms, as at 30 April 2010. The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Please ensure investors read the Simplified Prospectus before investing. The Gartmore UK Absolute Return Fund invests in shares and derivative instruments, providing both long and short positions, which may be more volatile than other investments such as cash or bonds. The Fund aims to achieve a positive return in all market conditions, however, this is not guaranteed and it may not always meet this objective. The views expressed are Gartmore's views and must not be taken as an offer to buy or sell units or shares in the markets mentioned. These views are provided for information purposes only. The views expressed are as at 13 May 2010 and are subject to change.

• This entry was posted on: Tuesday, 18 May 2010 14:52 BST
• Filed under: News
• Tags: Ben Wallace, Gartmore UK Absolute Return Fund, Luke Newman, News
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