Safe funds that have lost money

Date: Tuesday, May 13, 2008
Author: TimesOnline.com

Investors in funds billed as “safe havens” have racked up losses of as much as 10% during the credit crunch.

Among the worst hit are investors in Threadneedle’s £450m Money Securities fund, a “cash” fund that over the past year has lost money for its investors nearly every month.

The fund, marketed as a low-risk investment on a par with a building-society deposit account, has fallen almost 4% in value over the past 12 months. In contrast, deposit accounts on the high street are now paying more than 7%.

Other schemes designed to cope with falling markets such as 130/30 funds, which use hedge-fund techniques, have also produced lacklustre figures.

Here we look at some of the promises made and the performances actually achieved.

Cash funds

Cash funds, also known as money-market funds, are sold by many leading fund managers as safe investments with capital preservation as a top priority.

They invest at least 95% of their assets in money-market instruments — essentially deposit accounts or their “near cash” equivalents used by institutions.

These investments have caused many problems. Threadneedle, for example, last year had 40% of its fund in floating notes — bonds issued by institutions that have variable rather than fixed interest rates. As the credit crunch took hold many of these notes were downgraded, causing the value of the fund to fall.

Over the past five years, this “low risk” fund has grown by just under 10% — not enough to keep up with inflation.

“Most people probably do not realise that money-market funds can fall in value,” said Tony Ahearne at Moneyspider, which analyses fund performance.

Most other cash funds are not as exposed to this market as the Threadneedle one, and have delivered a positive return over the year. However, many have produced returns below 5%.

The Pru Cash Haven fund, for example, grew by only 2.68% over the past 12 months and the NatWest cash fund by 3.64%.

You would have been better off putting your money in a high-street deposit account such as the Icesave one-year bond paying 7.01%.

Some of the better-performing schemes are the Close Capital Account fund and the Wesleyan Cash fund but, again, these have increased by only 5.13% and 4.66% respectively over the past 12 months.

130/30 funds

As with other funds, managers buy shares they believe will rise — known as “going long”. They also sell shares they don’t own, intending to buy them back when the price falls — “going short”. This is risky and limited to 30% of the value of the fund.

They use the proceeds from shorting to buy more long positions, resulting in 130% long and 30% short.

The idea is that if equities fall in value, the part of the fund that is short should rise in value and protect the fund from the full impact of falling prices.

However, of the eight funds launched last year, all but one have underperformed their benchmarks. Invesco European 130/30, for example, is down 1.4% compared with its benchmark, the MSCI European, which is down 1.03%. Resolution Cartesian UK Equity 130/30 is down 11.9% since its launch last December. This compares with a drop of 1.74% in its benchmark, the FTSE All-Share.

Jason Butler of Bloomsbury Financial Planning said: “Shorting stock is as difficult as picking long-only equities. There is also the added risk that if the shorted stock rises in value rather than falls, the fund will have to pay a premium to purchase the stock so it can give it back to the lending institution.”

If you do want to invest in 130/30 funds, Ben Yearsley at adviser Hargreaves Lansdown likes Resolution’s fund. “Though it’s had a tough time since launching in December it has been a pretty unusual five months,” he said. “The managers have a good track record managing long-short hedge funds and their long-only funds are on our recommended list.”

Absolute return funds

The main aim of an absolute return fund is to achieve a positive return even when markets are falling through the use of derivatives.

Managers typically use cash as their benchmark and aim to outperform standard measures such as Libor — the rate at which banks lend to each other — whatever the market conditions.

However, many have performed badly in the past 12 months. The Schroder ISF Absolute Return Bond, for example, is down 0.59% while the Absolute Insight Emerging Market Debt fund is down 1.15%.

Despite the poor performance of the sector, Jonathan Miller of Citywire said some were still worth a look. He said: “Absolute returns do not give any guarantees on performance, but a manager who can deliver positive returns in any market condition using various strategies is worth considering in a portfolio.”

He recommends Mark Lyttleton’s BlackRock UK Absolute Alpha fund, which has generated returns of more than 12% in the past year while the FTSE All- Share index has gone down 4%.