Absolute returns: advisers’ views

The research uncovered the way in which advisers are choosing to use absolute returns vehicles, the types of clients they are recommending them to, as well as revealing some concerns about the way in which they are presented by the industry. Above all, the results revealed a growing level of interest in this type of fund, albeit littered with some widely held misconceptions.

“The key concern for the industry is that advisers and their clients clearly understand what absolute returns investing is about and exactly what it involves,” states Dan James, Global Head of Rates and Multi-Strategy Fixed Income, at Aviva Investors and co-manager of the newly launched Aviva Investors Multi-Strategy (AIMS) Target Return Fund. “The research highlighted what we already expected, which is that, while most advisers have a good understanding of absolute returns, there is some confusion around the jargon used.

“As a provider, we have a clear incentive to explain what our funds do in straightforward and transparent terms. Advisers shouldn’t have to work too hard to have a clear understanding of a particular fund’s objectives or how that fund achieves them. One of the outcomes we know investors want is capital growth. Our new fund seeks to deliver that outcome by targeting an average annual return of 5 percent above the Bank of England base rate, before charges, over a rolling three year period. The outcome we are seeking to deliver is aligned with the needs of our clients, they simply want to grow their investments.

What is more, the survey also revealed a degree of conflation of different types of absolute returns funds, with multi-asset and multi-strategy funds often grouped together for comparison. Nick Samouilhan, a multi-asset manager who works alongside Mr James on the fund, stresses the danger of this approach and the need for greater education and differentiation by the industry.

He says: “In terms of the way in which funds are presented, well over half of respondents thought the IMA sector needed to be divided up further. There seems to be an umbrella term of ‘absolute returns’, which covers a range of different types of funds, from hedge fund style vehicles that have been repackaged within a UCITS framework, through to outcome-oriented funds like ours, which offer a sophisticated and complete solution. Looking back, when absolute returns funds first started emerging there were a number of rogue funds and, when the financial crisis hit, a lot of them were losing money, which really damaged the reputation of the sector as a whole. Moving forward, funds like ours show that taking a multi-strategy approach rather than simply balancing one market beta against another can add genuine diversity, complemented by further risk-reducing mechanisms.”

Mr James adds: For example, with the AIMS Target Return Fund we use our house view as our starting point to help us develop strategies to diversify the fund, those strategies sit within our market returns and opportunistic returns section of the portfolio. We are aware though that at times we will be wrong about our house view, which is where the risk reducing strategies come in. This is a section of the fund that will deliver positive returns when we are right but delivers even better returns when our central view is wrong. By combining a number of different ideas and strategies we can take positions that should allow us to deliver our target in any market condition.

Overall, both managers were encouraged by the findings uncovered by the research, particularly by the large percentage of advisers recommending absolute returns funds of various types to their clients. They agree, however, that more work still needs to be done on educating clients on the different types of absolute return fund and what they can offer them and the place it can take in their portfolios.

“A further point that struck me from the results was the fact that, while a lot of advisers are opting for absolute returns funds, there is still greater scope to extend their usage,” Mr James adds. “Almost half of respondents when asked what type of clients they recommend absolute returns funds to stated they offered them to clients with larger pots. Whilst we believe that a multi-strategy solution like AIMS Target Return to be a core foundation within a larger portfolio upon which investors can add other building blocks, we feel that for smaller investors, these solutions provide access to a diversified portfolio, which may not otherwise be available on an individual basis.”

Dan James is Head of Global Rates and Multi-Strategy Fixed Income

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The value of an investment can go down as well as up. Investors may not get back the original amount invested. The return objective is a target only and there is no guarantee that it will be achieved. In order to fulfil the fund’s objectives the manager invests principally in derivatives contracts. Please refer to the fund objectives and investment policy contained in the Key Investor Information Document and the Prospectus.

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An Aviva company. www.avivainvestors.co.uk CI063144 09/2014