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Sarasin & Partners said Ucits III has given actively managed funds better means to tackle stagflation than structured products with a standard capital guarantee.

Harry Talbot Rice, manager of the £203.5m Sarasin EquiSar IIID fund, said the wider investment powers of Ucits III had enabled the fund to target an RPI plus 3.5 per cent annualised return over rolling periods of at least three years. Derivatives had also enabled the portfolio to build in a much greater degree of capital protection, he said.

But if markets fell and inflation persisted, structured products with a standard capital guarantee would simply return investors' original sums regardless of how much inflation had devalued them, according to Mr Talbot Rice.

In contrast, he said, an actively managed fund could deliver investors returns in line with inflation over the time horizon of a structured product.

"We're not constrained to that limit in the same way as a structured product might be."

To protect investors' capital, the Sarasin EquiSar IIID fund is able to reduce its net long market exposure to as little as 30 per cent under normal market conditions, with a maximum normal net exposure of roughly 60 per cent.

It uses contracts for difference to short stocks in line with Ucits III. As part of this, it uses pair trades - going long one company and short another - to express views within its investment themes.

These themes exploit what Mr Talbot Rice considers to be inevitable developments in the market such as rising agricultural yields.

The fund also buys put options that allow it to sell stocks for a set price in case they dip below what the managers consider their minimum valuation. The fund can also trade variance swaps to express views on market volatility.

If it has no spare cash to express views on a stock, it can finance the purchase of one set of options by selling another set. But under Ucits III, the fund can theoretically be as much as 100 per cent invested in cash if it needs to be.

However, Rupert Tate, head of IIID products, warned investors off thinking of EquiSar IIID as an absolute return vehicle.

"We will give you as much of the upside as we can when the market is going up. But when the market is weak, we will turn to increasing capital protection and market volatility."