Mark Dampier: Fund absolutely stands out from the crowd

The Analyst
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The Independent Online

When choosing a fund do not assume it will closely match the sector it is in. This is a rule I use for any fund, but it is particularly pertinent in the absolute return sector where there is a particular need to look under the bonnet and see what is going on. For instance, year to date, the top performing fund is CF Odey UK Absolute Return, up over 16 per cent, way ahead of the average of 1.5 per cent. Yet it is a very different animal to others in the sector such as Cazenove UK Absolute Target, which adopts a lower risk approach with capital preservation very much at its heart.

Run by James Hanbury, the Odey fund has been a rip-roaring success since its launch in 2009. The fund mainly invests in UK equities but has a remit to allow 20 per cent exposure to continental European stocks and a further 10 per cent in commodities. The fund contains around 40 to 60 holdings and is primarily long equities with opportunistic short positions. The straightforward interpretation of this is that the fund will be far more volatile than many other absolute funds. I am sure investors already on board won't mind as the ride up has been very good so far, but it does make a comparison with the sector somewhat meaningless.

The influence of Crispin Odey, owner of Odey Asset Management and arguably one of the best fund managers in the industry at reading the macro-economic environment, is in evidence in the fund. However, James Hanbury's own style is very much bottom-up, looking for stocks which are market leaders on low price-to-earnings multiples, and offer dependable growth, such as US healthcare giant Johnson & Johnson.

Mr Hanbury also explained to me that he looks for stocks where the perceived risk is greater than the actual risk, therefore making the stock cheap. He likes to see large family or management ownership in the company. When it comes to shorting stocks, he takes a long-term approach looking for companies facing structural challenges to their business model.

One of the largest holdings is Sky Deutschland, the equivalent of BSkyB in Germany. Apparently, Germany pay TV has a history of failure, but two years ago News Corporation bought a stake and management changes were made resulting in the Sky packages we are familiar with in the UK. This has led to high levels of client satisfaction and an increase in subscriptions. It is still nowhere near that of the UK but the potential looks huge.

Although the portfolio is dominated by larger companies, some smaller firms are represented. One is Hargreaves Services, a small company growing rapidly in the unfashionable business of processing and transporting coal. James Hanbury likes the fact there are high barriers to entry in this area, something he actively looks for when selecting stocks. This is not something you could normally say about commercial property, but Regus, another smaller company holding in the fund, has tried to make itself recession proof after it almost went out of business in 2000. At this time 80 per cent of its offices were leased directly to TMT companies, many of whom went out of business. Their business model has now completely changed to a highly flexible one. With a "Regus card" their customers' employees can decide to work in any of their 11,000 offices around the world on any given day.

Essentially, I like what James Hanbury is doing with this fund, but where it falls down is its unappealing charging structure. There is a 1.25 per cent annual management charge plus a 20 per cent performance fee based on all positive returns. This led to an exorbitant total expense ratio of 5.5 per cent in 2010 and 7.5 per cent in 2009. In defence Hanbury says the fund will be kept small and nimble, capped at the £400m level. He also points out that all of his own investment money is in the fund. However, I have a problem with there being no performance hurdle whatsoever. He is charging himself an awful lot of money!

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

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