Investments  

Patchy performance fails to derail inflows into sector

Absolute return funds are one of those issues that creates a clear divide, a little like Marmite – you either love them or hate them.

The asset class was created to meet a demand from investors and followed the advent of Ucits III, which essentially enabled hedge funds to be sold to retail investors.

The IMA Absolute Return sector was created in April 2008 and, unlike most other sectors, it is outcome focused rather than asset based, with two main criteria for its constituent funds: produce a return of more than zero and do this within rolling 12-month periods, regardless of market cycle.

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Because of this outcome focus the sector is a hotchpotch of funds spanning bonds, equities and a range of geographical areas, all of which make it difficult to compare like with like.

A key bone of contention with these funds is that, in spite of their name, while the sector as a whole has returned 3.05 per cent for the 12 months to December 11, 16 of the 74 funds in the sector had recorded a loss for the same period, according to FE Analytics.

Furthermore 10 of the 44 funds with a three year record recorded a loss for the period, the worst being the £1.7m SVM UK Absolute Alpha’s loss of 26.7 per cent for three years, a trend that continues over a 12 month period as it posted the worst loss of 17.73 per cent. This continued underperformance and lack of assets led to the fund closing on December 31.

Advisory firm Bestinvest noted in its November 2012 market insight on the sector that absolute return strategies “generally fared better in the third quarter [of 2012] delivering small positive returns as they managed to capture some of the market’s improved appetite for risk”.

Not all funds should be tarred with the same brush of course. Some in the sector have performed well, such as the £287.7m CF Odey UK Absolute Return fund, which is ranked first in the sector over one and three years with returns of 32.45 per cent and 60.23 per cent respectively.

For investors, these positives seem to outweigh the negatives, with the Absolute Return sector recording the highest net retail sales in September, one of only three months in the 10 months to October that were not dominated by bond sales.

But in response to the wide range of performance and strategies in the sector, the IMA instigated a review in June 2012. The conclusion of the review was scheduled for the end of 2012, but the complexity of the issue has delayed things, with a response now expected next month.

In a statement Daniel Godfrey, chief executive of the IMA, explains: “This is an important issue for consumers and, having only taken over as chief executive in December, I want to consider all the evidence and all the options thoroughly before we take any final decision.

“I expect that we will be in a position to announce the conclusion of our review by the end of February.”