I've decided to change tack this week and talk about a fund that isn't ready to go into your portfolio yet. The fund I have in mind is the brainchild of Daniel Godfrey, the former head of the Investment Association (IA), the fund managers' trade body. Godfrey left the IA after a tiny bit of controversy about the transparency of fund managers' costs. This has evidently emboldened him to think big, and he's just announced that he's going to set up something called the People's Trust in the first half of 2017: a brand new mutually owned investment trust investing in global equities.
This People's Trust sounds very radical (Citizen Smith might have approved), but it's really a return to the historic roots of the investment-trust industry back in the Victorian era. These trusts were more often than not set up as a mutual structure so that investors could gather together to invest in new ideas at low cost. The People's Trust will be a London-listed independent investment trust, built around an underlying holding company.
It will be 100% owned by customers and run entirely for their benefit, accessible to anyone who can save from £10 a week, and will pay no bonuses to its executives. Godfrey and the other executives will be paid partly in shares that must be held at least seven years, fostering an alignment of interests. There's also a feel-good element to its mandate: the fund will allocate 1% of assets to improve lives directly by investing in social projects.
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In terms of investment strategy, the fund will employ Willis Towers Watson, one of the world's leading investment consultants, as investment adviser on manager selection. Willis will be helping Godfrey and his small team find the right managers based on a simple idea a long-term total return objective of 7% per year, measured over rolling seven-year periods.
Godfrey will be looking for a number of key attributes in his chosen managers. He wants people who think for the long term, with high conviction (probably concentrated) portfolios and low turnover. He wants managers who will regularly stick their oar in with company managers and seek change to business practices if shareholders are losing money. He's also looking for managers who can properly articulate how they've invested and the strategy behind it.
Last, but by no means least, he wants to see managers who have skill in implementing these ideas that is, some evidence from their track records. However, Godfrey's not looking to track these managers on a day-by-day, year-by-year basis. He wants to give them a solid run of seven years to prove their mettle.
The People's Trust will in essence be a fund of funds, with somewhere between five and ten underlying managers, each given long-term mandates to run with their investors' money. This investment strategy interests me.
Many ordinary private investors have the same end goal as the People's Trust: long-term, positive returns from backing really active fund managers who have quantifiable stock-picking conviction. Godfrey is hoping that if you want these managers, you'll buy his fund. However, many of us might be tempted to do it ourselves build a portfolio of managers that we believe can generate real alpha (market outperformance) with our money.
Now, in truth, Godfrey's plan isn't a new quest. Outfits like Witan already do this kind of stuff, with some success. But if Godfrey pulls off this new launch, we'll be watching his choice of funds carefully. In the meantime, if you want to help the People's Trust, you can become a founder for £20 (£10 for under-35s) at its website ThePeoplesTrust.co.uk.
Absolute returns: "completely meaningless"
The average performance figure for the absolute-return sector masks large differences in performance between individual funds, says Laura Suter in The Sunday Telegraph. The funds, which aim to achieve a positive return in all conditions, have returned an average of 1.2% year-to-date, compared with 12.5% for the FTSE All-Share index. But this 1.2% does not reflect the extremes in performance across the sector.
For example, the BNY Mellon Absolute Return Bond fund has gained 23.5%, while the Argonaut Absolute Return fund has lost 20.5% so far this year. "Absolute returns" is "completely meaningless" anyway, says Jason Hollands of fund supermarket Tilney Bestinvest. The term "is a catchall for a very wide range of strategies", says Hollands. "You need to look at the objectives on specific funds."
There is a lack of understanding about what one can expect from absolute-return funds, agrees Terry Smith in The Daily Telegraph. These funds are supposed to protect you from unexpected shocks in the markets. But "it's hard to predict the outcome of something you don't even know exists".
Leaving aside the fact that absolute-return funds use complex hedging strategies that "neither you nor I understand", notes Smith, their hedging has "pretty much ensured that while their investors have not lost money, they do not make any either". For example, many funds hedged their overseas holdings into sterling and so didn't benefit from the boost that the fall in the pound has given to the sterling value of international assets.
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