Robert Tyerman reviews the recent developments in the investment fund markets

Retail investors have been coming back into unit trusts with a bang. Figures from the Investment Management Association show that the amount put in by private investors reached £7.4 billion in the second quarter of this year and was the highest on record.

IMA chief executive Richard Saunders says retail investors have chosen equity funds, particularly those specialising in international equities, as well as bond funds. A rally in the UK stock market has encouraged this trend, though private investor enthusiasm is by no means a sure pointer to the future direction of markets.

When derivatives deliver
Some of those still looking for protection against falling markets, combined with some scope for joining the rally, have put money into funds such as BlackRock’s UK Absolute Alpha Fund, whose assets have now reached £1.6 billion, says co-manager Nick Osborne. Launched four years ago, the fund has deployed a variety of techniques with derivatives to preserve investors’ capital by taking short as well as long positions in a time of volatile stock markets. So far, the strategy has worked, outperforming the FTSE All Share Index.

One feature has been the use of  ‘synthetic shorts’ in falling markets, which most other UK authorised unit trusts do not employ. Osborne explains that these operate in a similar fashion to traditional short selling of shares but are placed through contracts for difference rather than the underlying shares themselves, ‘so someone else does
it for us’.

‘We have the tools and skill to save people from very bad experiences when markets fall,’ comments Osborne, who points out that the fund’s net exposure has moved from 25 per cent long to ‘modestly short’ over the past two years, with cash balances sometimes as high as 60 per cent. ‘Where we have seen opportunity in other asset classes, we have allocated funds in that direction, notably in convertible bonds.’

He argues that the fund’s techniques also work in rising markets: ‘We can keep pace with the market as long as it is not actually roaring away.’

The fund’s built-in controls limit its potential upside to 50 per cent and its downside to 30 per cent but, in practice, the annual variation has been from ‘plus 13 per cent to a very small fall’. In the year to March 2007, Class A UK Alpha Fund units underperformed the All Share index with a 10.3 point gain against an 11.3 per cent rise for the index.

During the next year, the fund rose 13.1 points while the index moved 7.8 per cent lower, and in the 12 months to last March the fund fell 3.1 points while the index dropped 29.3 per cent. Despite acknowledging recent ‘encouraging economic newsflow’, Osborne warns that ‘the recovery is uncertain and febrile’ and argues that ‘we can participate in the rally and limit the risk of a fall’.

Shrinking some more
Calamities continue apace at Lloyds Banking Group with the dismemberment of its Halifax Bank of Scotland fund management operations. After a ‘robust strategic view’, Lloyds is transferring the management of £42 billion
of funds from its Insight Investment arm to its Scottish Widows Investment Partnership division, whose assets under management will swell to £125 billion.

The bank has agreed to sell Insight’s £80 billion external fund management side, catering for pension schemes, third-party distributors, intermediaries and other companies to the Bank of New York Mellon Corporation. Mellon is paying £200 million cash and £35 million in shares in a deal that Lloyds director Jo Dawson argues will enable Insight better to develop its external franchise.

Missing the bond bus
Corporate bonds have come into vogue as investors search for returns in a low interest rate environment. However, this has been of limited value to F&C Asset Management, which reported an 8.5 per cent fall in assets under management to £88.3 billion in the first half of the year. Chief executive Alain Grisay comments that, though industry-wide sales of UK retail funds were up 6 per cent year-on-year, ‘significant flows have gone into the sterling corporate bond sector, where F&C does not currently have a large retail presence’.

In the event, F&C, which lost £67.3 million before tax in 2008, showed an £11.3 million loss in the first six months of 2009, compared with a £3.4 million profit a year previously. But the board decided to maintain an interim dividend of 2p a share.

Grisay is clear that the most important corporate development for the group during this period was its demerger from Friends Provident, which finally became effective at the beginning of July, thereby ending a ‘prolonged period of ownership uncertainty that has severely impacted on our ability to generate new business’. As well as greatly expanding F&C’s shareholder base, the de-merger, preceded by the appointment of Nick McAndrew as chairman, has won favour with investment consultants and seven global firms upgrading their view on F&C from ‘hold’ to ‘buy’.

New role for star player 
Hermes Fund Managers has recruited as its new chief operating officer John Mould, who previously performed the same function at New Star Asset Management. A former head of operational risk at Morgan Stanley, Mould played a key role in New Star’s impressive growth after the redoubtable John Duffield set it up in 2000 before its indebtedness proved too much for it and it was acquired by the Henderson group in February.

Hermes boasts the BT pension fund among its clients. It is now steering the telecoms giant into putting some of its assets into distressed debt instruments, which will form part of a credit portfolio established last year. In his new role, Mould will bring together responsibility for the firm’s central service functions, which was previously shared between several people.

Changing the guard
Richard Hornbrook has left Chelsea Building Society, where he was chief executive for the last four out of 28 years’ service. Stuart Bernau, the society’s chairman and for 12 years a director of Nationwide, is combining both roles until a longer-term replacement is found to run the 134-year-old society, now Britain’s sixth largest with assets of £14 billion. 

Hornbrook, like Bernau, says Chelsea is now implementing a new corporate plan, which makes it an appropriate time to hand over the reins. Bernau, a former chairman of the Council of Mortgage Lenders, declares himself committed to maintaining the values instilled into the society by Hornbrook.

Elsewhere, wealth management specialist Spencer-Churchill Private has hired Lady Emily Compton, former social editor of Tatler magazine, to introduce wealthy clients and help with new business ventures. She has previously worked as a model and ambassador for Ferrari and Versace.

Robert Tyerman is news editor of Growth Company Investor, the UK’s leading magazine for AIM and small-cap analysis