Henderson seeks to allow wider derivative use in managed fund

Henderson plans to change the investment policy of its £296.7m Managed Distribution fund to allow wider use of derivatives.

The fund – formerly under the New Star brand – can currently hold derivatives for efficient portfolio management, but the group plans to alter the fund to permit the managers to use the instruments for investment purposes, subject to unitholder approval.

Managed by John Pattullo, Jenna Barnard and Trevor Green, Managed Distribution is split between 60% fixed income and 40% equities.

If approved, Pattullo and Barnard will be able to utilise larger positions in derivate instruments which have generated strong returns for the pair’s Strategic Bond and Preference & Bond funds – such as the short on government bonds and long credit CDS.

Henderson says the use of derivatives is not likely to materially increase the risk profile
or volatility of the fund, with the mainstay of investment activity expected to remain in ordinary fixed income and equity securities.

“By giving the Henderson Managed Distribution fund additional derivatives capability we are aligning the fund with the approach taken on the Henderson Strategic Bond and Preference & Bond funds,” Pattullo says.

“In 2008, the ability to use credit derivatives to hedge out credit market exposure and interest rate futures to benefit from falling interest rates meant we were able to protect the capital of the Henderson funds to a much greater extent than we would otherwise have been able to do.

“It is encouraging that going forward the Managed Distribution fund will be able to benefit from the additional flexibility that derivatives provide for bond funds and means it can take a more strategic approach to the fixed income portion of the fund.

“Trevor Green will also benefit from having the capability to use equity futures to manage the equity portion of the fund.”

In addition, Henderson is looking to alter the structure of the fund’s annual management charge.

Currently the fund’s AMC is split 50/50 between income and capital, but the group is looking to charge the whole AMC to capital. It says the move would enable the fund to distribute a higher level of income, which it believes should appeal to the majority of the investors in the product.