Barry Golden is looking to drop gross redemption yield in favour of high cover
Hargreaves Lansdown fund manager Barry Golden is taking a defensive stance on the zeros Oeic he is running for the group.
Golden, who has run the HL Zeros Fund since it launched in March this year, is looking to invest in instruments with a high level of cover and with a relatively short time period to wind up, such as M&G Recovery which he bought at 98p and which should wind up in the next few months a 102.5p.
There are two themes playing in the portfolio at the moment. He said: 'We've taken a view to forfeit some gross redemption yield in favour of high cover. We are also concentrating on shorter end trusts as we believe the markets are going to look soggy for some time.'
He added that while no zero has ever failed to pay out in full it is only a matter of time until this record breaks, especially in current market conditions.
There are now many more zeros that are geared up with bank debt, according to Golden. He added: 'This means that the bank effectively owns the trust and can wind it up but more importantly the cover is geared so a fall in the market can have a disproportionate effect. In the old days if the market fell 33% you still knew you were going to get your money.
'Now the underlying portfolios don't look like the market and gearing means that smaller falls can potentially have a greater effect.'
Golden's long term strategy is to buy into undervalued zeros but he believes there is scope for the market to be come cheaper.
He added: 'There are one or two trusts that are not very well regarded and will probably be re-rating stories but today is not the time to buy as the markets may make them look cheaper.'
When choosing the holdings for his portfolio Golden looks for the most attractive risk reward ratios. He said: 'This doesn't always mean the highest quality zero, so there is a lot of qualitative analysis. We meet fund managers, look at the underlying portfolio and take a view on the market.'
According to him, the ideal zero is one with a reasonable underlying portfolio, a reasonable level of cover and a decent gross redemption yield, yet is misunderstood by the market. He said: 'We want the market to think it is a lesser quality zero than it is and hopefully the fund will get re-rated later on. This means a short-term result for us and has already happened with trusts such as Jupiter Dividend Growth and Murray Global Returns.'
One reason for the growing interest in zeros has been that in the last three years markets have barely moved while zeros have returned around 12% annualised.
This in turn has led to a spate of zero fund launches in the last 18 months, with vehicles from Investec, Aberdeen, Framlington, Gartmore and Hargreaves
Golden said: 'We feel that we are not jumping on the bandwagon as we have been dealing with zeros for around a decade as has Exeter fund managers.
'Historically, zeros have been viewed as a way of planning for school fees and getting tax breaks, you do not get that with a fund of zeros. It has now become an investment class on its own as people see the benefits of investing in zeros.'
The Oeic fund has an annual fee of 1%. Golden said: 'We think this is reasonable when gross redemption yields are 8%. Investors definitely don't want too much to go in the fund manager pocket. Lower charges are important as the quick and high returns possible from equities cannot be expected with zero funds.' Investment Week 23 July 2001
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