Absolute return funds: David Crawford

Meanwhile, in a bull market, when economic growth is driving up share values, absolute return equity funds will tend to adopt an overall long position. In the early stages of a bull market, investors can expect these funds to underperform long-only equity funds as the manager adjusts the portfolio to suit the new market cycle. In the middle of the bull market, the expectation is for the manager to deliver good performance, more in line with long-only equity funds. Then fund performance might once again taper off as the market begins to move into a new cycle.

It’s clear then, that the expected performance of absolute return equity funds will vary over time. This emphasises how important taking a long-term approach to investment is. These funds should outperform long-only equity funds in a bear market, but they’re also well placed to deliver good performance over a full market cycle of bull and bear combined, because of the variety of strategies that they can use.

In further consideration of investment risk, one strongly held belief among investors is to buy during a bull market and sell during a bear. This is certainly a valid approach and one that is particularly applicable to managers of long-only equity funds. However, absolute return equity fund managers have the ability to exploit both bull and bear markets so they are not bound by any one strategy. If investors commit funds long term to a fund, rather than trying to time themselves in and out of individual investments or funds, they will be well positioned to receive positive returns.

The actual duration of a full market cycle is open to debate, and can be perceived as anything from 10 years onwards. For this reason, it’s also helpful to keep in mind typical investment time frames, with the short term being six to 12 months, the medium term three years, and the long term five to seven years. The key point is that a long-term approach to investment is what’s required if investors are to benefit from these funds.

In current market conditions, investors in absolute return equity funds should be able to expect relatively high returns. Most funds typically seek to deliver 10-15 per cent per annum across a full market cycle. The appeal of the new absolute return funds is that through an innovative combination of wide-ranging strategy and regulation, they can provide both short-term protection and long-term growth. In an ever-shifting market that’s a good combination.