Fund Objective

The Merrill Lynch UK Absolute Alpha Fund seeks to achieve a positive absolute return for investors and, as such, the Fund will not be managed against any UK equity index.

View on Past Performance

The Fund had its most difficult quarter since inception, returning -4.8%. By comparison, stockmarkets fell sharply (FTSE All-Share index down 12.4%) and volatility rose to extreme levels. In such an environment, it is unsurprising that the Long portfolio made the largest negative contribution to performance. Our Short positions did support the Fund's value, while our decision to markedly reduce both gross and net exposures was helpful.Credit market conditions dominated once again with the failure of a number of high profile financial institutions both in the US and Europe. The demise of AIG and Lehman was particularly notable, as for the first time providers of senior debt funding made substantial losses. Understandably this somewhat reduced the willingness of investors to offer credit to other institutions and the increased burden on interbank markets led to sharply higher funding costs.In short, credit markets became gripped with paralysis, limiting access to capital for both consumers and companies. The consequences for economic growth are potentially serious. Fund performance was disappointing over the quarter. Previously, we have profited substantially from our view that the credit market dislocation would be severe and long lasting, notably through negative views on those companies that were most directly impacted.More recently, we have arguably been slow to anticipate the secondary impacts, including the consequences of a reduction in global growth expectations on commodity prices. It is important that we constantly challenge and reappraise our views. Given all we have learnt over the period about the availability and cost of credit, the relative performance of equities exposed to this area was surprising.

Future Expectations

We still believe that companies with inappropriate financial structures are likely to be particularly vulnerable to trading disappointments and that domestic economic activity is likely to remain depressed. Furthermore, while global growth is likely to slow, the positive variance of emerging market expansion relative to the developed world is likely to continue. This leaves us confident that the Fund is correctly positioned to benefit from the evolution of these trends in the medium term.

Fund Details