It is rare to find a fund that is totally uncorrelated. This has been especially the case in recent times where strategies that previously had demonstrated little or no correlations have been dragged down with everything else. We believe Acheron is such a fund. Until its recent planned liquidation, Life Offices Opportunities Trust offered similar characteristics and the Fund had a large holding, which was cashed in profitably in October.

In fact, Acheron is even less market oriented. Its investment objective is to achieve capital appreciation of approximately 15% per annum through the purchase of life settlements. Indeed, since its launch it has produced slightly higher returns. A life settlement is a financial transaction in which a policy owner owning an unneeded / unwanted life insurance policy sells it to a third party for more than the cash value offered by the life insurance company. When a policy is purchased, the following parameters are known: the purchase price, the amount to be collected at maturity, premiums requiring to be paid until the insured passes away and the fees of maintaining the policy. The only unknown parameter is time or when the policy will mature.

As the time to maturity is vitally important in ensuring maximum returns, Acheron have concentrated on buying policies where the duration is likely to be short. Hence, they have bought policies on the lives of policyholders with life threatening diseases and senior citizens. To date, maturities are running ahead of both internal and third party analysis.

Originally published in December 2008.

This is an investment trust that SVM has invested in from its inception in 1998. The fund was launched around the time of the 1998 market turmoil and recently celebrated its 10th anniversary. In conjunction with the anniversary, there was a continuation vote which was comfortably passed and an issue of ‘free’ subscription shares. It is a fund of funds specialising in a broad spread of emerging markets. They categorise emerging markets as Asia (ex Japan), Latin America and EMEA (Europe, Middle East and Africa). Although they are broadly in line with their benchmark index, individual country exposure varies quite markedly.

t has outperformed its benchmark consistently since launch – the benchmark itself comfortably outperforming the World Index until very recently. Its principal manager, Nigel Wilson, has been investing in the sector for many years with Bank of England Pension Fund and Unilever Superannuation Fund prior to joining Progressive Asset Management.

The recent market falls, increased volatility, investor risk aversion and lack of liquidity has driven down all markets. However, both emerging markets and the fund had been de-rated to ridiculous levels. Indeed, the fund, which comfortably traded at single figure discounts for years, was marked down to a near 20% discount. This was stock specific due to its financial advisors being ‘between jobs’ and effectively unable to provide corporate broking services. Its competitors in the sector actually experienced discount contraction over this period. This provided a good buying opportunity as the rating subsequently has started to normalise.

Originally published in November 2008.

It would be a gross understatement to say that investing in virtually all types of property assets has been unrewarding over the last eighteen months. Underlying asset values have declined in most developed markets especially US and UK. However, emerging markets have not seen asset value corrections and, indeed, many are forecasting continued asset value growth.

For a fund investor, what is more interesting has been the extreme de-rating of closed-end funds specialising in property. Discounts on property funds range from a rather narrow 15% to an eye wateringly large 78%. Although property asset values may continue to decline, some of the discounts currently available look too high even allowing for the levels of gearing within the funds.

One of the more interesting is South African Property Opportunities (SAPRO). At the current share price, the discount is nearly 60%. Unlike many of its competitors, its asset value continues to increase (albeit slowly) and has limited gearing with no covenant problems. The principal concern is the power problems being experienced in South Africa. We estimate that that only approximately one third of the properties are suffering short term delays – nothing insurmountable.

Other than the issue of gearing, discounts appear to exist because investors do not believe the asset values. SAPRO should soon be in a position to sell a number of their properties, crystallising the asset value in cash. We understand that this could be returned to shareholders either through a cash distribution or through share buyback. In any event, a 60% discount looks anomalous.

Originally published in October 2008.

This month, we are focusing on a fund, Cambium Global Timberland or TREEs to its friends, which we attribute to the ‘hedge’ section of the portfolio. Forestry, which combines elements of real estate and commodity investment, is not a volatile asset class and, as such, is an ideal portfolio diversifier.

It should have little correlation with the performance of shares and so it has proved in the recent market turbulence. Even though the highs and lows of the paper and construction industries influence the price of timber, it is always possible to stop felling trees until the market picks up. In addition, mature wood is more profitable than smaller, younger trees and, unsurprisingly, the trees grow and become more valuable year on year. Indeed, there is a subtle trade-off between felling and selling the lumber sooner or waiting and reaping a higher price in the future.

The fund principally invests in forestry that can be managed on an environmentally and socially sustainable basis, principally in North America (mature trees), South America (new), Australasia (mature and semi mature) and Asia (semi mature). Its aim is for an annualised return of 12%, with an extra 2-4% from its environmental options and a target dividend yield of 5% once fully invested.

The fund is currently 60% invested, has achieved its target 12% return in its first year and recently paid its inaugural dividend. It is finalising commercial terms with the aim of being fully invested by the end of the year.

Originally published in September 2008.

This month we spotlight an investment made about a year ago. PSource Structured Debt is a London listed version of Laurus Offshore Fund, a well respected $2bn US hedge fund. Both funds aim to deliver a total net of all fees return to investors of between 10 and 15% per annum. Indeed, since launch in early 2001, Laurus Fund has delivered annualised returns in excess of 18% with extremely low volatility. The fund has only recorded two down months with the maximum monthly drawdown being 0.38% in August 2007. The fund’s low correlation of returns with equity and debt markets has been a boon in the recent market turbulence.

The fund’’s strategy is to invest in a diversified portfolio of asset backed loans and debt made predominantly to small companies across all industries in the US and Canada. Typically attached to these loans are ‘‘free’’ equity warrants at modest premiums to the underlying investment’s prevailing share prices. This ensures an alignment of interest with the portfolio companies. Of primary importance is that Laurus invest in only strong asset backed companies with strong management and high growth potential. The fund places a strong emphasis on capital protection and has strong collateral requirements – 99% of their investments are in the senior secured loans. As such, it is not surprising that their default rates have historically been very low. As an added attraction, the PSource fund pays a 5% annual dividend which should ensure that the share price trades close to the underlying asset value.

Originally published in August 2008.

This month we highlight one of the larger holdings in the portfolio and certainly one of the least volatile. It is a fund generally misunderstood but one that the Managers know very well. We should as we are their managers as well.

LOOT’s original investment remit was to buy and hold until maturity traded endowment policies. The fund was launched in 1996 with a twelve year life. The fund effectively went into realisation mode in 2006 with policies maturing on a daily basis thereafter. The fund has been very active in ensuring that the market was aware of the estimated terminal asset value and it was relatively simple to calculate the yield to maturity.

From 2006 until fairly recently, the annualised yield was in excess of 10% with limited risk. Indeed, over the last year, the risks have been reduced markedly and more than 90% of the investments have been encashed. As of the end of June, there were only 88 policies accounting for 7% of the fund yet to be paid out. Of these, only a handful had yet to indicate their final maturity values.

Even now, the estimated terminal asset value is approximately 170p and the current share price just less than 160p. LOOT’s board have announced that the Fund will be liquidated at the start of the fourth quarter with distributions being made very quickly thereafter. A quick calculation would indicate an almost guaranteed return of 6% over the next four months – an annualised return of close to 20%.

Originally published in July 2008.

JPMorgan Russian Securities was formed in 1994 and remains the sole pure Russian equity fund in the investment trust sector. It started life as a closed ended offshore fund, becoming an investment trust in 2002. Over the ten years since the Russian debt crisis of 1998, the asset value has increased nearly 800% and the share price an astonishing 1500% - making it one of the top performing funds in any sector.

We believe that Russia continues to remain one of the most attractive markets. Of the BRIC economies (Brazil, Russia, India and China), Russia appears to have the most favourable dynamics and has become paradoxically one of the safer markets in the world. In contrast to 1998, Russia now has a stable political background, large current account surplus, a growing economy and is a major exporter of much sought after commodities. In addition, there is a growing will to restructure some of its ancient infrastructure and banking system.

Unlike many emerging market funds, the fund does not attempt to track its benchmark, preferring to take a more bottom up approach. To this end, its returns are much less dependent upon the large energy related companies that dominate the indices. Rather it focuses on domestic facing businesses and on the restructuring process that is underway in Russia. Unlike the west, the Russian banking system has been a very profitable area for investment and the fund retains an overweight position. The fund appears to be relatively immune from the pressures being experienced elsewhere.

Originally published in June 2008.

This month we return to a favoured theme – private equity. The fund in focus this month is itself a fund of funds which gives exposure to a broad spread of interesting private companies across the globe. The fund has approximately 70 limited partnership investments that provide underlying exposure to in excess of 1,000 individual companies. The fund's underlying exposure is h ighly diversified with investments in 34 countries, from 10 different vintage years and in all styles of private equity.

Their investment strategy is to invest alongside fund managers with proven track records, to buy only mature assets with embedded value and to maintain a diversified portfolio to mitigate risk. The fund was launched in June 2005 and has demonstrated a net asset value and share price return in excess of 20% subsequently. Unlike many private equity funds, where returns are heavily skewed towards the end of their lives, this fund books profits through distributions on an ongoing basis. These distributions allow for the re-cycling of capital into new funds.

This is particularly helpful in the current market where secondary assets are available at attractive levels from motivated or distressed sellers. The fund tends to concentrate on smaller deals where there is less competition. There are a number of large secondary players but relatively few smaller ones. In addition, the fund has a rare non-US bias, preferring to invest in Europe and Asia. Finally, the fund has an aggressive discount control mechanism, through bi-annual tender and the open market, to ensure a narrow discount.

Originally published in May 2008.

In these days of extreme volatility, we thought that it might be interesting to spotlight a fund that has virtually no correlation to global stockmarkets although it is listed. Ceiba Investments was formed following the reconstruction of Beta Grande Carribe in 2003. It is currently the only listed fund investing in Cuba incidentally, it pays a dividend of approximately 6% per annum.

As most will know, there are heavy restrictions placed on Cuba by the United States and, in fact, US investors are prohibited from investing in Cuba and indeed the fund. Notwithstanding this, Cuba has continued to do business with the rest of the world for decades and Europe, in particular, appears to have been the principal beneficiary. The fund is one of the few conduits through which foreign exchange can be channelled into Cuba, principally for the tourism industry, and they are paid well for this facility.

The reasons that Ceiba Investments is interesting now are twofold. Firstly, their principal investment, which is a controlling interest in Monte Barreto (Havana's leading office and commercial real estate complex), has recently been given government approval to develop an area triple its current size. To date, the initial phase has not been materially re-valued upwards and should be at the next valuation point. Secondly, and ultimately more important, Fidel Castro recently stood down as President to be replaced by his brother. With Fidel's departure, there is likely to be a gradual thawing of the icy relations with the US, leading hopefully to the dropping of the embargo.

Originally published in April 2008.

It is perhaps unsurprising that the new issue market has recently been flooded with funds that focus on agriculture. Soft commodities in particular have risen steeply in the last few months. The primary market is well known as a trailing indicator – issuing what is currently hot and sellable. In any event, the Fund has had exposure to agriculture for some time. Our two principal investments are Vostok Nafta Investments and Ceres Agriculture Fund – both have performed well in recent months. Vostok Nafta was covered in detail in the September 2007 factsheet.

This fund's objective is capital appreciation through investing in a diversified actively managed portfolio of primarily exchange traded agricultural contracts. The portfolio is diversified through taking positions, both long and short, in Grains (such as corn, wheat, soy, oats and rice), Tropicals (such as cocoa, sugar, rubber and orange juice), Fibres (such as cotton, wool and silk) and Livestock (such as cattle and hogs).

The fund does not operate leverage; its volatility is low and is aiming to achieve at least a 12% annualised return. Due to the strength in markets, the returns are currently compounding at closer to 15%. Although the management group is relatively new (formed in 2004), its principals have on average over 15 years experience in trading commodities. In addition, their underlying traders have even greater experience, averaging 20 years. The beauty of this strategy is that each trader acts independently of each other in his defined commodity under strict risk parameters imposed by the managers.

Originally published in March 2008.

In these times of market turbulence, we felt that it might be useful to spotlight a fund which has not been adversely affected by market volatility. Indeed, the fund's share price has risen over the month, albeit only by a small amount. On a passing note, it is strange that funds which promote themselves as absolute performance funds have - in line with markets - seen heavy falls in January 2008.

KGR is a fund of hedge funds with specific focus on Asia - unsurprising given its name - and is a multi strategy fund. Unlike some, it is not materially long biased and hence does not rely on positive markets to generate returns.

Although pan-Asian, it has purposely kept a low weighting in Japan which has been very beneficial. In addition, it is positioned to take advantage of the increased volatility in markets through a range of non-directional funds. The fund has a performance target of 12% plus per annum with volatility in single figures. This makes the fund a perfect addition to our portfolio. Incidentally, the fund returned an above trend 15% in 2007.

Unlike most hedge funds, the shares did trade on a small discount and our position was purchased on an average discount of 3%. Subsequently, this discount has been erased and the fund is currently trading around parity. The Managers believe that 2008 will be challenging, especially for countries with large deficits and the requirement to source finance. This does not apply to Asia as a whole.

Originally published in February 2008.

This month, we spotlight a fund which until fairly recently had been largely ignored. However, it is now of a size (£150m) that permitted its promotion into the FTSE All-Share Index last month. This will require index buying which should provide a floor on the share price and discount. The fund started life following the restructuring of Aberdeen Latin American Investment Trust in 2003 and its asset value and share price progression has been impressive. SVM Global bought its original stake in August 2003 and has benefited in a near tripling of both asset value and share price.

The fund is branded as a high yield resources fund but it isn't. It is indeed a resources fund with in excess of 95% in resources but it does not enjoy a high yield - its current yield is only slightly in excess of 1%. This is less than both its larger rivals Merrill Lynch World Mining and Merrill Commodities Income Fund. However, we see City Natural as a natural complement to both as it has a different investment focus through investing in smaller more vibrant companies.

Its manager, Richard Lockwood, is well seasoned with many decades under his belt as a fund manager. Additionally, many of the fund's investments - approximately one third - are in the form of convertibles which allows a degree of downside protection in adverse times. The fund also has a substantial weighting in companies exposed to gold which has recently surged to all time highs.

Originally published in January 2008.