The IA Targeted Absolute Return sector topped the list of investors’ favourites in February with net retail sales of £243m, but how have these funds actually performed?
Funds in this area tend to aim to deliver a positive return regardless of market conditions and, following a review of the sector, the IA renamed it in June 2013 to the Targeted Absolute Return sector to avoid suggestions of guaranteed returns.
“It also removed a reference to a typical 12-month time frame for funds to meet their objectives in favour of a “strict maximum” timeframe of three years, and initiated monitoring of the sector by reporting how many times in the past two years a fund has failed to deliver a positive return over rolling 12-month periods.
The latest figures for February show only 20 of the 93 funds listed had no negative 12-month rolling periods in the past two years.
This means more than three-quarters of the sector have delivered some kind of negative return in at least one 12-month period.
However, comparing performance is tricky; the sector is home to fixed income, equity and multi-asset strategies, as well as those focused on a particular region.
Of the top 10 best-performing funds in the sector for the five years to April 8 2016, three are focused specifically on the UK, two on Europe, one globally and one on the US.
ABSOLUTE RETURN - EXPERT VIEW Martin Bamford, chartered financial planner and managing director of Informed Choice, gives his opinon on absolute return funds |
“We remain generally unimpressed by absolute return funds. While their objectives are admirable, especially during volatile market conditions, in practice they have often failed to deliver an absolute return once inflation and charges are taken into account. The lack of consistency in this sector contained with complex investment strategies and high performance-related fees makes them unattractive to the majority of investors. “For funds in this sector with a three-year track record, annual performance ranges from +19.8 per cent to -1.9 per cent. The £26bn giant of the absolute return sector, Standard Life Investments Global Absolute Return Strategies, has lost 5.3 per cent over the past year, after achieving a positive return in each of the previous six 12-month periods, demonstrating just how fickle these funds can be. “Investors and their advisers also have to consider how these funds correlate with other holdings in a well diversified investment portfolio. Absolute return funds are not an easy solution for investors worried about market volatility. Selecting the most suitable fund in the sector and choosing an appropriate allocation within a wider portfolio remains a big challenge.” |
In its latest Asset Views round-up, the investment team at Whitechurch Securities points out that with correlations increasing between traditional asset classes, there is a need to seek alternative areas that improve diversification.
The report states: “The demand for bond substitutes is leading to a greater choice of ‘Absolute Return’ funds that aim to generate a positive return irrespective of market conditions. We use these funds to reduce cyclicality and spread risk in portfolios.
“However, if investing in these funds, it is important to be selective and understand the wide-ranging differences in risk and reward profile that these funds can offer.
“In these extremely volatile periods, funds such as Newton Real Return and Invesco Perpetual Global Targeted Returns have been particularly impressive in grinding out steady positive returns in the year to date.”
Darren Bustin, head of derivatives at Royal London Asset Management, adds: “The IA Targeted Absolute Return sector is very broad, containing different funds across different asset classes and strategies.
“As a sector, it is a bit like a car dealership, filled with many different cars, all designed for different uses and built with different engines. You wouldn’t compare a sports car to a 4x4 despite them both being cars and capable of getting you from A-B.
“One way to level the playing field would be to look at risk-adjusted returns. Instead of taking performance in isolation, perhaps research providers should compare returns with an overlay of risk per unit of return or drawdown.”
The majority of these funds, and the sector as a whole, haven’t yet managed to earn the trust required to step in, even when they could be most needed Patrick Connolly, Chase de Vere“The sector is a dog’s breakfast and rational analysis at a sector level is nigh on impossible, and analysis at a fund level is very difficult – inter alia because whatever their longs/shorts mix today, it can change tomorrow – so you can never be confident what risks you or your client are taking.”
Performance comparison is clearly problematic, with investors needing to do their homework on the underlying strategy and asset classes they invest in; but, on the whole, have these funds delivered what they set out to do – provide a positive return in all market conditions?
Patrick Connolly, certified financial planner at Chase de Vere, points out the current environment should be providing the opportunity for absolute return funds to demonstrate they can play an important role in investment portfolios.
But he says: “The majority of these funds, and the sector as a whole, haven’t yet managed to earn the trust required to step in, even at this time when they could be most needed.
“Too many of these funds are too highly correlated to stockmarkets and so, as markets have struggled, the average absolute return fund has also lost money.”
In addition, he notes even when stockmarkets rise, many funds in the sector achieve little more than cash-like returns and with much higher charges, sometimes including performance fees.
“This doesn’t mean that all absolute return funds are bad. For some clients they can have a place as part of a balanced and diversified portfolio,” he says.
Nyree Stewart is features editor at Investment Adviser
