Potter slams “miserable” absolute return fund performance

In the latest FundWatch, Mr Potter, the co-head of Thames Rivers’ mutli-capital team used data from Lipper to analyse all of the 36 IMA sectors in the final three months of last year.

It showed that the IMA Absolute Return sector was the fifth worst sector over that period, returning just 0.2 per cent for the quarter, while losing 1.2 per cent for the year.

He said: “In a quarter that was generally not brilliant for returns and a year that was certainly not positive for equities, these funds ought to have done considerably better – you would expect them to underperform in strongly rising markets but the idea is that they hold up better when equities are struggling, which does not seem to have been the case during 2011.

“With returns on cash still negligible it is disappointing that these funds have not managed to make any ground.”

However, he added that it was important to remember that the sector was young, populated with funds that vary in strategy, geography, positioning and investable universe.

“The funds in the IMA Absolute Return sector are managed very differently and, despite some poor performance figures, our view is that none of these are inherently incompetently run – 2011 was after all an extraordinary and highly volatile year for the markets; a difficult backdrop for even the most experienced of fund managers,” he said.

“Nevertheless, after losing money in Q3 (-2.4 per cent) and for 2011 as a whole, we would like to see returns above cash at least from these funds to regenerate interest in what should be a very appealing sector in such volatile times.”

The manager added that it was “crucial” that investors and advisers understand exactly what they are buying.

Looking at the remaining sectors, Mr Potter noted that there had been greater consistency in perceived ‘riskier’ rather than ‘safe’ sectors.

Looking at the TRMC Consistency Ratio, which measures the proportion of funds in the 12 main IMA sectors that have performed consistently above average in each of the last three 12-month periods, in addition to those that have been consistently top quartile over the same period, the manager said the divergence of performance was clear.

One of the most consistent sectors for top-quartile fund returns over the period to the end of last year was Japan, while North America and the Sterling Strategic Bond had no funds at all achieving top-quartile consistency.

Rob Burdett, co-head alongside Mr Potter, said: “The survey results over the full three years to the end of 2011 show that fund performance across perceived ‘riskier’ sectors such as Japan and Europe ex UK was stronger in terms of fund consistency, while performance in the so-called ‘safe havens’ of North America and Sterling Strategic Bond, which topped the IMA best-selling net retail sectors three times during 2011, has been poor.