F&C launches first UK equity 130-30 fund

F&C is poised to launch "within weeks" what it believes will be the first so-called "130-30 fund" to invest in British equities.

The F&C UK Enhanced Alpha Fund will be managed by Luke Newman and Makis Kaketsis, two of F&C's rising star stock pickers.

130/30 funds, which have become rapidly popular in the United States, overlay a portfolio which is 100% invested in equities with an additional long / short strategy. Such funds have grown rapidly in popularity in the United States and several European groups have recently announced intentions to launch such products.

"The F&C UK Enhanced Alpha Fund promises to be the first 130-30 fund to invest in British equities with a fundamental investment strategy. Unlike America where 'black box'-style quantitative strategies are the most common method for investment, the 'skew' of the FTSE All share index towards a small number of mega cap companies makes fundamental investing more suitable for UK equities and allows us to leverage off the strong track record we have in running high alpha long-only products," said Richard Wilson, Head of UK Equities.

The fund, to be co-managed by F&C's rising stars Makis Kaketsis and Luke Newman, will employ a combination of being 100% net long of the equity market and 30% short of stocks that the managers think are overvalued to finance an additional 30% of added exposure to high conviction stocks. The net position of the fund will therefore be 100% invested in the markets.

This strategy not only allows them to benefit from their convictions in undervalued stocks if, as they hope, they rise in value but by removing the 'short constraint' they also stand to benefit from their convictions in overvalued or structurally challenged stocks in the anticipation that the share prices will fall.

"As long only fund managers perhaps the greatest constraint to generating excess return is the inability to short, in other words our ability to express our negative view of a stock is very limited. Clearly, as stock pickers running high alpha funds, we are constantly taking such views on companies by either going underweight or indeed not holding a particular stock at all. But the material benefit of those views is limited. A 130/30 fund, utilising the wider powers available under UCITs III, removes that constraint and allow us to make money on our negative as well as our positive positions. Our long only positions still need to be able to outperform the benchmark but by combining an element of netting off between the long and short positions, the risk return profile is also more favourable," added Wilson.

Both managers have a proven track record in managing high alpha strategies. Kaketsis manages the F&C UK Dynamic Fund (first percentile in the IMA UK All Companies year to date) and Newman is manager of the F&C Special Situations fund (top decile since the fund's launch in December 2005). Both funds are aggressively managed focus funds, comprising between 40 and 65 stocks, with a portfolio composition driven by bottom-up stock selection.

Newman and Kaketsis will apply the 'lifecycle' investment approach which they use in their existing funds, to the portfolio of the F&C UK Enhanced Alpha Fund. The lifecycle approach targets companies which are either set to benefit from a recovery or restructuring phase, a period of growth or those that have the ability to reallocate cashflow to more profitable areas of business, also known as 'compounders'.

"The beauty of this approach is that having been tried and tested in our existing long-only funds to find undervalued stocks, it can also be used to identify those business with structurally fading franchises, "said Wilson.

"In essence, we are not adding anything new but simply leveraging off the existing investment process which has driven strong performance in both Luke and Makis's funds."

The managers will employ a fully synthetic solution through a single fully collateralised swap.

"Overcoming the operational aspects of running these funds should not be underestimated, including the ability to offer daily pricing and dealing. Only a few managers will have the ability to execute these strategies and F&C has built up a wealth of experience in this regard, most recently with the launch of the GTAA fund and our Liability Driven Investment SICAV products," concluded Wilson.
The F&C Enhanced Alpha UK Fund will be structured as a SICAV, domiciled in Luxembourg, with a sterling share class for both institutional and retail investors. The fund will target between 40-60 stocks in the long portion and between 10-15 stocks in the short portion. The strategy will initially follow a 130/30 structure although listing particulars will allow a maximum exposure of 150/50.