The concept of “absolute return” investing came to the retail market following changes in the rules for fund-management companies in 2002.
Broadly speaking, it allows fund managers such as Mark Lyttleton and Nick Osborne, at BlackRock, to use more sophisticated strategies as introduced in the Ucits (undertakings for collective investment in transferable securities) regulations.
Most managers have to hold companies in their portfolios not because they think they will outperform, but simply because they make up a large part of the index against which the fund is benchmarked.
The BlackRock fund is different, according to Mr Osborne.
He said: “All investments earn their place in the portfolio on their ability to outperform. We don’t hold anything just because it’s part of a benchmark.
“If we don’t have conviction, we stay in cash.”
During the volatility of the last 18 months, the fund reached 55% in cash, but is now 75-80% invested.
Mr Osborne said: “Our conviction has increased, mainly as a result of the once-in-a-generation valuations we witnessed in March, the sheer scale of government stimulus programmes and the subsequent improvement in economic data.”
The traditional fund manager’s objective of simply beating the other funds in the same sector means that, during tough times, even the best “long-only” funds can only boast that they have lost a smaller amount than their peers.
The main benefit of the Ucits regulations is that, not only can managers buy companies they believe are cheap, they can sell “short” those they believe are too expensive and will fall in value.
Mr Osborne did not believe any additional skills were required to be able to “short” stock.
He added: “All the work we do every day is about identifying cheap companies and expensive companies. It’s just that we can express our views in a much more elegant way within this fund.”
Last year provided an excellent test for the fund, with the UK stock market falling almost 30%.
Mr Osborne added: “The fund was up by 1.5% last year and so far this year we are up by 7.8%”. Little wonder then that the fund has grown rapidly to £1.6billion in size.
Barry O’Neill is a chartered financial planner with Thomson Shepherd and can be contacted on 01224 619215