The 130/30 fund approach may sound good in theory but investors should look past the hype and take a sceptical approach, Morningstar says.
Popular in the United States, a 130/30 fund is structured with 100% of the value in a long only portfolio and 30% invested in a portfolio which shorts stocks.
Morningstar senior fund analyst Todd Trubey says a 130/30 fund is “extremely dependent” on a manager’s stock-picking skill.
“Stock-picking is even more important (than long term funds), as managers must correctly pick shares that will go down and shares that will go up,” he says.
“This creates the possibility that if the manager fares poorly on both fronts, the fund could suffer much more than he would at a long-only offering.”
In a report scrutinising the new phenomenon, Trubey says 130/30 funds are inclined to have lower sensitivity and are more likely to underperform in a rising market.
“Until we see clearer evidence that they can consistently add value over the latter, we don’t think there’s a compelling reason to include them in portfolios,” he says.
But Luke Newman, manager of the new F&C Enhanced Alpha UK Equity fund, says assuming one has the ability to pick the right stocks, the 130/30 vehicle can generate the same alpha as a long only fund, but with a better risk/reward dynamic.
Launched yesterday, the F&C fund will hold 40-60 stocks on the long side and 10-15 for the short term.
“I agree with Morningstar in so much that the theory of what have been called ‘130/30’ funds does look very compelling,” he says.
“We don’t see it as a revolution, but as an extension of what we have already achieved, and we have a consistent track record of delivering returns above the benchmark.”
Newman says his fund, jointly managed with Makis Kaketsis, is a relative proposition and will be benchmarked against the FTSE all-share index.
“Removing the short constraint gives us a wider investing universe to look at – we currently only are able to take meaningful active positions against the largest names in the FTSE,” he says.
“The size of the extension will be between 10 – 40%, but the net exposure will always be 100% as with a long only portfolio and the beta will be around 1.”
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