Alistair mundy believes stock market and some zeros are overpriced
Investec's fund of zeros has upped its weighting in structured products and derivative instruments to 35%.
The £59m Investec Capital Accumulator Fund, run by Alistair Mundy, now has 25% in listed structured products such as Merrill Lynch Defined Returns and 10% in artificial zeros, a percentage capped by the fund's trustees.
It also holds 15% in cash because Mundy, who joined Investec in August 2000, believes the stock market and many zeros are still overpriced. When prices become more attractive he will look to take opportunities. He is also looking forward to further quality split and structured product launches.
He said: 'We have been creating our own synthetics and have around 10% of the fund in these. That is where the trustees have allowed us to go so far, but the rules restrict us to 10%.
'Our argument is if we do a synthetic on FTSE 100, we get a better GRY than in the zero market and a better hurdle rate. It's very transparent so we don't have to worry about cross shareholdings and it is very cheap to manufacture. It is also very liquid.'
Mundy said selling holdings in zeros can take weeks and the greatest danger in synthetics is that the counter party, usually a large investment house, goes bust.
Mundy massively reduced the risk of the portfolio with a programme trade on 7 February this year in response to his belief that zeros with a cross-shareholding of more than 10% in other split capital investment trusts were virtually impossible to price effectively and far riskier than the market had acknowledged.
He sold out of 28 stocks, costing the fund 200 basis points. Since then the performance differential between Investec Capital Accumulator and its main competitor funds, including the £149m Exeter Zero Preference fund, has been marked.
Capital Accumulator is down 4.13% in the six months to 1 November compared to a loss of 17.58% for the Exeter fund.
Aberdeen Progressive Growth was down 25.05% and Jupiter Preference down 21.74%, while Premier Zero Preference fell 13.45%. Over that time however, the Gartmore Stable Growth fund managed a loss of just 1.97%, partly due to a high cash position.
Mundy's large programme trade means the fund now holds no investments in trusts employing barbell investment policies, in part because of the riskiness of the underlying assets introducing thematic risk, or in trusts with more than 10% cross-shareholdings.
He said: 'The underlying exposure on our portfolio is very much the old-fashioned high yielding FTSE 350 equities.
'For the riskier splits, the underlying exposure is to smaller companies, healthcare or technology. We know the chance of any theme running into trouble is high as we have already seen this year.'
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