Wednesday 11 July 2012

Question
I'm considering buying the Insight UK Market Neutral Fund as a defensive option given that it offers low volatility and low-risk income. Though I have information about how the fund operates e.g. uses a pairs trade, I'm uncertain about buying as it so very different from my other investments.

I have a portfolio of funds which includes mainly equity income funds, some high-yield bonds and quality (corporate) bonds; cash and about a dozen blue chip shares. In principle I'm a "cautious investor" although the above may not appear as such. I am incidentally retired.

I have my portfolio with Bestinvest -- were you not with them some years ago? -- but I'm finding that their advisers come and go frequently and sometimes you cannot get a satisfactory answer to a query. The personal annual review is patchy and often just repeats the ideas given in their well researched brochures.

I hope this is not too much to ask and perhaps too specific. I am encouraged, however, after reading some of your replies to questions. They are very thorough giving a lot of good solid information.

My thanks in advance.Answer
Sorry for the slow reply, afraid I've had too many other distractions the last few months to devote much time to the site. Back on the case now though...

The Insight Absolute UK Equity Market Neutral fund sounds a good idea in theory. The manager tries to remove market risk by buying shares in a company he likes and 'shorting' (i.e. placing a bet the price will fall) on a company in the same sector he's less keen on - the so-called 'pairing shares' approach.

An example will hopefully better explain this. Suppose company A and company B are both high street retailers. The manager thinks A will perform better than B but is worried that the sector (indeed, markets as a whole) could be quite volatile. If he buys A and shorts B then he'll benefit if his hunch that A performs better than B is correct. However, shorting B will also protect him if the sector/markets falls as a whole - because shorting a share makes money if its price falls.

However, in practice the fund's performance has been less than convincing. While it's mostly managed to side-step market falls, it's struggled to make money overall. Total returns over the last three years have been just 2.7% - you would have been far better off in a decent savings account..It's a fair period over which to judge the manager as market volatility has been high - just the sort of conditions in which this type of fund is meant to shine.

I can't see a reason to put money into the fund, nice though the concept is. If you're keen on the idea of absolute return funds then perhaps take a look at other more successful funds in the sector, such as Standard Life Global Absolute Return Strategies and CF Odey UK Absolute Return - but please bear in mind there's no guarantee these funds will continue to deliver what's on the tin, most don't!

Yes, I did once work at Bestinvest and it was a very productive, enjoyable time, especially as there was a strong emphasis on impartiality and giving clients a great deal and service. Following a 3i funded management buyout in 2007 Bestinvest founder and driving force John Spiers took a back seat and a few employees, including myself, decided it was an opportune time to leave and seek fresh challenges. Since then I gather staff turnover has been reasonably high (as you seem to have experienced) and I was very disappointed to read in the trade press recently that Graham Frost, Bestinvest's highly regarded Chief Investment Officer, is to leave the firm.

Despite Graham's departure I still think Bestinvest has an excellent research team, but it sounds as though they perhaps need to pull their socks up when it comes to looking after clients like yourself. I would be inclined to drop their CEO, Peter Hall, a polite complaint outlining your issues. Hopefully you'll receive a positive response aiming to resolve these. And, if not, perhaps consider trying out a different adviser, although you may struggle to find one that gives advice in return for trail commission only (as per Bestinvest), most will want initial commission too or look to charge a hefty fee.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question601.aspx

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