InvestmentsApr 18 2016

Cautious investors seek alternative sources of return

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Cautious investors seek alternative sources of return

The early part of 2016 has proved the perfect environment for attracting inflows into absolute return funds as volatile markets in January and February forced investors to err on the side of caution.

Investment Association (IA) figures for February show the IA Targeted Absolute Return sector was the bestselling IA category in the month by net retail sales, showing just how quickly investors moved to more defensive strategies.

Cautious investors will flock to absolute return funds on the basis they promise to deliver returns whatever the market environment.

Ian Rees, head of research, multi-asset funds at Premier Asset Management, notes: “The current environment appears more conducive to looking for opportunities from absolute return strategies.

“Not only can they help insulate from the volatility of bond and equity markets, but where the expected returns from these asset classes look muted, the opportunity cost for owning absolute return is now much lower.”

Bonds and equities alone may no longer satisfy investors’ needs for income or the level of returns they require in the low global interest rate environment. In addition, increased uncertainty across asset classes is adding to investors’ nerves.

There is a much greater level of understanding about alternative products than there ever has been Nick Osborne, BlackRock

Nick Osborne, co-manager of the BlackRock UK Absolute Alpha fund, compares the macroeconomic environment of today with the post-2008 landscape.

“For much of the period since the financial crisis, investors have experienced both rising bond and equity markets. This has been in conjunction with historically low interest rates and persistently subdued levels of volatility,” he says.

“However, over the past 12 months this backdrop of apparent stability has given way to more and more uncertainty.

“Investors have been reminded that equity and bond markets are not always a one-way bet, and despite rates moving even lower in Europe and Japan to help stem falling inflation, interest rates in the US remain on course to rise again in time.”

He adds: “Volatility has also spiked across all asset classes, most notably in the Chinese equity market, resulting in significantly large price falls across the commodity complex.”

Mr Osborne predicts returns from both equity and bond markets are set to be lower for some time, which explains why the current environment is creating demand for absolute return funds. “We also believe double-digit volatility is more likely than double-digit returns,” he says.

“A growing number of investors are therefore looking to protect their portfolios against the prospect of rising volatility, and one such route is through lower-risk equity products.”

In the past, the strategies behind absolute return funds have caused confusion among investors, but following changes to what is now the IA Targeted Absolute Return sector by the trade body, there seems to be a better understanding about how these products fit into an overall diversified portfolio.

Mr Osborne adds: “There is a much greater level of understanding about alternative products than there ever has been and more investors are comfortable allocating away from traditional equity and bond allocations and towards alternatives.”

Mr Verhoeven believes the recent surge in popularity of absolute return funds is likely to be a longer-term trend, but suggests if there is a distinction to be made, then it is that investors are seeking absolute return funds “that offer transparency, liquidity and at lower costs”.

Ellie Duncan is deputy features editor at Investment Adviser