According to Morningstar, the fund lost 7.06% in the calendar year 2011; according to its own internal monitoring, it fared little better, losing 6.9%. This compares with positive returns in each year since it was launched in April 2005 including 2008 when it returned a positive 1.98% (1.5% internally) compared to markets that generally made double-digit losses during the same 12 month period.
Fall in AUM
The fund – co-managed alongside Nick Osborne since 2008 – has also seen a huge downturn in assets under management, with a steady rise to £1.94bn in 2008, up to £2.87bn by the end of 2009 before rising to £3.31bn in 2010. It ended 2011 at £1.9bn.
Such disappointing numbers led Lyttleton to issue an update to investors at the end of January, in which he describes 2011 as “the toughest year that the BlackRock UK Absolute Alpha Fund has endured”. He went on to explain why he has subsequently made changes to the stocks held and the portfolio’s construction in an attempt to generate more consistent returns over the medium term.
“While the fund is controlled within a very strict framework, returns will ultimately be determined by the judgement of its managers.
Regrettably in 2011, stock selection was poor overall,” he writes. “We began the year optimistic that very cheap valuations and a positive outlook for corporate profits would trump uncertainty over the solvency of peripheral Europe. We were slow to recognise that while it was economically possible to confine the sovereign crisis to smaller southern European states, it became politically impractical.
“The value that we found in equities at the beginning of the year led the fund to have a degree of positive market exposure which proved unhelpful as markets fell.”
He is as quick, however, to admit that it would be wrong to blame poor market conditions, adding: “The majority of the fund’s poor performance can be explained by picking the wrong shares.”
His describes his oil stock selections as “disappointing”, and the long side of his UK consumer book as “negative”.
In an effort to revive the fund’s performance numbers, he has reduced the number of holdings within the portfolio to include only high-conviction stocks. He has also sold a number of under-performing companies.
His conclusion is: “Fundamentally, we have confidence that the model is not broken and believe that the attributes of the UK Absolute Alpha Fund are valuable, particularly in a world that remains so uncertain.”