Introduction
Much of this stems from the continual debate over whether they actually deliver what they say they will, which is to provide an absolute return. The suggestion that retail investors might be confused and expect a guaranteed return led to the Investment Association (IA) renaming the sector in 2013 to the Targeted Absolute Return sector. Yet it remains a mishmash of funds – from those focused on bonds or equities to others specialising in the UK or emerging markets.
As a result, comparing funds in this sector can be tricky, and yet it has proven to be one of the most popular among investors in recent months as market volatility saw them seek alternative sources of return.
Net retail inflows into the IA Targeted Absolute Return Sector have been relatively steady – somewhere around the £100-200m range from April 2014 until February 2015 – before market uncertainty started to boost the sector’s popularity.
In April the sector saw a record £529m of net retail sales, its highest level on record, with the trend continuing in June and July with the sector easily surpassing the £400m mark.
As a result the sector’s total funds under management have increased from £45.2bn in January 2015 to £52.8bn as of the end of September 2015. One notable beneficiary seems to have been the Investment Adviser 100 Club member City Financial Absolute Equity, which has seen its assets grow from £88m at the end of April to roughly £214m at the end of October, according to data from FE Analytics.
Other funds that have seen their sizes increase in the past six months include the Threadneedle UK Absolute Alpha fund, which has grown from £346m to £576m. Meanwhile, the Aviva Investors Multi Strategy Target Return fund continues to grow with assets reaching £809m by the end of October, up from £703m in April.
The larger funds, however, have also managed to take their share of the assets coming into the sector, with the Invesco Perpetual Global Targeted Returns fund gaining more than £2bn in the six months, while the Standard Life Investments Global Absolute Return Strategies added just under £1.5bn to reach £26.1bn by October 30.
So with investors seemingly not discriminating in terms of fund size, the question is whether they are taking the time to look under the bonnets and analyse exactly what their absolute return funds are offering, or are they just piling into the current sector favourites.
Looking at the constituents of this varied sector, some adopt cash benchmarks, mainly using one- or three-month Libor, others use inflation targets, while some use traditional equity benchmarks and some no benchmarks at all. With this in mind, how can you tell what you’re investing in?
While the sector may be flavour of the month, with the funds’ shorting ability a key advantage in volatile times, investors need to be aware that it works both ways. Should markets stabilise the performance of absolute return funds could wobble, so investors need to have confidence in the strategies they’ve chosen.
THE PICKS
CF Odey Absolute Return
Launched in 2009 this £973m fund is managed by James Hanbury with Jamie Grimston as assistant portfolio manager. The aim of the fund is to achieve a positive absolute return over a 12-month period, investing in equities with the use of both long and synthetic short positions. It’s five-year return to October 20 is one of the most impressive in the sector at 148.3 per cent compared with the sector average of 15.4 per cent, but its shorter-term performance is weaker with a 12-month return of 12.3 per cent.
Polar Capital UK Absolute Equity
One of the newer entrants into the sector, this fund was launched in September 2014 and has just £14m in assets. Run by Guy Rushton, it aims to achieve a positive absolute return on a 12-month rolling basis by investing mainly in UK companies, but also to a lesser degree in European and global equities. Having just passed its first anniversary the fund remains on target with a 12-month return to October 30 of 26.2 per cent compared with the sector average return of 3.7 per cent.
EDITOR’S PICK
Henderson UK Absolute Return
Co-managed by Luke Newman and Ben Wallace, both of whom joined Henderson Global Investors in 2011 following its acquisition of Gartmore, this fund has been a member of the Investment Adviser 100 Club for three years running, winning the Absolute Return category in 2015. The £780m fund aims to provide a positive return over the long term regardless of whether markets go up or down. For the five years to October 30 it has delivered a return of 34.4 per cent compared with the sector average of 15.4 per cent.
