Threadneedle Absolute Return Bond Fund

Absolute return funds are different as they aim to generate positive returns in all market conditions. Regulatory developments have greatly increased the range of tools available to fund managers in recent years and this is reflected in the UCITS III directive. These regulations allow the use of derivatives and other sophisticated investment tools but within a fully authorised and regulated OEIC vehicle.  The Threadneedle Absolute Return Bond Fund has built a strong track record of delivering absolute ‘cash-plus’ returns using the flexibility allowed by UCITS III. This allows Threadneedle’s team of investment professionals to create alpha by including their highest conviction fixed income and currency views within a risk controlled framework.

A Precision Instrument

• An ideal structure
  As a UCITS III OEIC, the fund brings together the tools and strategies that have historically been the preserve of hedge funds to a broad range of investors within a fully authorised and regulated framework.

• Built for fast-moving markets
  Active use of derivatives allows the managers to reflect their views accurately and quickly in the fund.

• Additional routes to generate alpha
  By employing derivative techniques to short certain parts of the market, the managers are able to generate alpha within the portfolio in more ways than a traditional managed fund.

Portfolio Construction
The portfolio is constructed using two main building blocks, each of which is used to deliver  different aspects of performance:

1. Underlying physical assets
   This is the bedrock of the portfolio and uses money market securities and bonds as they provide liquidity and security.  This part of the portfolio usually makes up to 80-90% of the fund.
2. Derivative Overlay
   This area of the portfolio is used to generate alpha,. Examples of potential investment strategies are:

• Directional positions designed to benefit from absolute moves in markets
  Example: long call options on Fed Funds futures, reflecting
  bearish views on the US economy and below consensus
  interest rate expectations

• Relative value trades, to exploit moves between bond classes
  Example: short high yield bonds to benefit from rising yields against a risk-averse market background

• Investments made to profit from changes in the shape of yield curves
  Example: overweight position in short-dated bonds vs short position in longer-dated issues to make money from steepening yield curves

• Currency positions based on our analysis of foreign exchange trends
  Example: long euro vs Icelandic krona to gain from expected strengthening in the former versus the latter.

The examples above are provided for illustrative purposes and may not be current positions in the fund.

Focused Alpha Generation
The managers limit the number of alpha generation strategies employed within the primary investment area of the portfolio to approximately 10 to 12 at any one time.  Some of these strategies may be more long-term plays whilst others may be very short-term in response to market movements. The number is limited as a risk control mechanism to ensure that the managers fully understand all the risk within the portfolio at any one time. By employing
more than 12 strategies, the managers believe the potential for greater returns is outweighed by the increase in risk within the portfolio. 

• Clear Risk Controls
  The fund is a low risk investment, not a “no risk” option. As such, setting and adhering to clear risk budgets is central to its success.  The portfolio adheres to a strictly monitored risk budget. Moreover, managers are supported by an industry-leading third party risk
  decomposition system that shows where risk is being taken within the fund at any time.

• Sensible Approach
  Experience and discipline play a vital role in managing lower risk portfolios. The team has consistently used its experience to identify opportunities and mitigate risks. For example, the money market investments that form the bedrock of the portfolio have been kept in
  highly rated credit and highly liquid short-term government bonds throughout the recent liquidity crisis. Discipline has been exercised in order to crystallise profits promptly throughout the fund’s life.

• A Strong Team with Complementary Skills
  By reflecting views from across the bond and currency markets, the fund taps into the vast experience of Threadneedle’s 30-strong fixed income team. Three managers are particularly key to the portfolio:

•  
  • Quentin Fitzsimmons, as Head of Government Bonds, Quentin brings experience, economic expertise and a long-term perspective
  • Peter Allwright, Peter’s background is in investment banking and his instrument knowledge and market expertise has created significant value for the fund
  • Stuart Frost, Stuart is a charting and currency forecasting expert whose technical skills and discipline help to set entry and exit points for strategies in the fund.

Extensive Experience of Hedge Fund Techniques
Some of the instruments used by the fund are less familiar to broader investors. This in itself creates opportunities for the team by way of market inefficiency. However, in running a portfolio that uses derivatives actively it is crucial to have robust systems and risk controls in place. Threadneedle’s eight year track record in running hedge funds means that both front and back offices are equipped and experienced in the challenges posed by dealing in alternative instruments.

Important information
Past performance is not a guide to future returns. The value of investments is not guaranteed and may fall as well as rise, and may be affected by exchange rate fluctuations. This means that an investor may not get back the original investment.  References in this document to any fund do not constitute an offer or invitation to subscribe to shares in such a fund. Subscriptions to a fund may only be made on the basis of the current Prospectus or Simplified Prospectus and the latest annual or interim reports, which can be obtained free of charge. The Absolute Return Bond Fund may invest in derivatives and may hold up to 100% in cash or money market securities. Therefore, there are additional risks associated with this Fund.

Issued by Threadneedle Investment Services Limited (TISL), registered in England and Wales,  no. 3701768, 60 St Mary Axe, London EC3A 8JQ. Threadneedle Asset Management Limited (TAML) is responsible for asset management for TISL. Both TISL and TAML are authorised and regulated in the UK by the Financial Services Authority. Threadneedle is a brand name, and both the Threadneedle name and logo are trademarks or registered trademarks of the Threadneedle group of companies.  threadneedle.co.uk

For Investment Professional Use Only
(not for onward distribution to, or to be
relied upon by, private investors).