Anyone tempted to move your cash ISA to Blackrock Absolute Alpha ?

LongTermLurker

My goal has moved recently from long term investing to short(er) term saving (but not because of market volatility) but I must admit I'm tempted to put some of my "regular savings" in here if only to make use of some of my CGT allowance.

Can someone explain the performance fee please?

jamesd

LongTermLurker, very roughly:

1. The current price is compared to the last end of year price where a performance fee was due (the high water mark) and if the current price is lower, there is no performance fee.
2. The performance fee is 20% of the difference between the fund's current improvement in value and the improvement in value you'd get if the money was earning interest at the LIBOR interest rate.

Performance fees can break the alignment of interests between fund managers and investors, since they can encourage taking large risks to get the performance fee. 20% of the extra can exceed many years of taking say 1% of the total money invested from the ongoing annual management charge. Imagine a fund that bought lottery tickets. It could get very high performance fees in a year when it won the lottery even while producing no return at all most of the time. And if there were ten funds doing this, each one could be shut down or merged after it won the lottery and collected the fee, since it couldn't later do well enough to get another fee.

The more positive argument for them is that they let the manager make more profit if the manager does better than the target. The cash interest rate target here seems reasonable for this fund since it's often being used to beat cash savings.

Caps on the performance fee might reduce the lottery effect risk by eliminating the incentive to take large risks.

For this fund its stability is the selling point and I don't think that the benefit of the performance fee currently makes it sensible for the manager to risk that growth in the amount invested just to try to collect an unusually large fee.

LongTermLurker

jamesd wrote: »

LongTermLurker, very roughly:

1. The current price is compared to the last end of year price where a performance fee was due (the high water mark) and if the current price is lower, there is no performance fee.
2. The performance fee is 20% of the difference between the fund's current improvement in value and the improvement in value you'd get if the money was earning interest at the LIBOR interest rate.

Thanks James. I thought it was more complex than that, because I thought I'd read something about comparisons being made daily? (Sorry, on a very slow GPRS connection at the moment so not spending too much time searching to see where I saw that, but it was somewhere on BR's website).

I've normally steered away from performance-related fees for the reasons you state (and also thinking it's plain cheeky and akin to restaurants adding automatic tips, something I hate dearly, but that's another story... :mad:).

I'm still unsure about this fund. The prospects look interesting and if the doom-mongers are right, then a bit of shorting might not be a bad idea.

jamesd

It's more complicated than that but the difference isn't worth worrying about. Have a look at the TER, that's where it shows up. More details are in the prospectus.

Something around 40% of my non-cash investments are currently in this fund. I'm moving more cash into this fund, outside any tax wrappers. No desire to pay tax on interest when I can instead use my CGT allowance and also expect higher returns than cash.

This also says a fair bit about what I think the value of investments that can do well in a falling market is at the moment. If I was very confident in the markets I wouldn't be using this fund much.