“We would of course like to see lower fees, but we have no problem with paying up for the ability of a manager to manage risk,” says Strojny. “And paying a substantial fee is not a problem for us as long as the manager generates performance. It’s not a key point in selecting a manager.”
Though it will be hard to find a fund selector who likes performance fees (it‘s more the fund managers who are so fond of them), Strojny believes a low hurdle rate is better than a high one.“We don’t want a performance fee to be an incentive for a manager to take more risk. This would also increase the chance of drawdowns,” he explains.
And quite some investors are ready to pay these fees: the Henderson Gartmore UK Absolute Return Fund has become the struggling company‘s top-selling fund, receiving €916m in net inflows over the past year, according to Morningstar data.
The popularity is partly due to many investors believing UK equities are bound for a correction. And that could be the time Wallace and Newman prove their value, believes Strojny. “They are positioned for that. They have a core book and a tactical book. At the moment, they have two thirds of their allocation in the tactical part.”
Pick your currency
The fund managers may do their best in mitigating volatility, in these Brexit-infused times that will be of little help if the end investor doesn’t hedge the exposure to the fund’s base currency: sterling.
It wouldn’t make much sense for investors who are seeking absolute returns in euros to leave the currency risk in place. Strojny therefore uses the euro-hedged share class of the fund. Because of the interest rate differential between the UK and the eurozone, hedging costs investors quite a bit of the already meagre performance: over the past year, the sterling share class of the fund generated a return of 1.86%, while its euro-hedged equivalent only returned of 1.01% over that period.
But that’s still quite a bit more than the hurdle rate itself would have earned you. And over any one-year period in the 8-year history of the fund, the Henderson Gartmore UK Absolute Return Fund has made money after deduction of fees. It therefore is one of only very few so-called absolute return funds that consistently live up to their name.
