A fund that promises to make money in any market condition is one that will surely attract attention, in the first instance. Whether it can then deliver on that promise is what will ensure that the attention is maintained.
Absolute return funds have been in and out of focus in the UK market for a number of years. Out of focus when markets are strong and in focus after markets have been weak. Launches occurred following the financial crisis and there have been a number of new funds appearing over the past couple of years.
The frustrating thing for fund investors is that there is no universal, accepted definition of what an absolute return fund actually is or should be. So if there is no one definition, how can any relevant comparison be made between funds - and how then can fund selectors judge proper client suitability?
Understanding the investment mandate
It remains important that, to research and determine whether an investment solution is suitable or not to provide needed or desired client outcomes, the investment mandate and how that mandate is achieved is necessarily investigated – the proverbial ‘looking under the bonnet’.
A long-only fund makes money when the market goes up and loses money when it goes down. An active long-only fund, ideally, should make more money when things are going well and lose less money than the market when it’s going down. This is a very intuitive concept.
The universally accepted view is that, generally, an absolute return fund’s return should always be positive over a rolling time period – or in reality, ‘almost’ always. Adding to this simple mandate is the complexity that the type of investment strategy used to deliver the outcome is not considered as important as the outcome.
In other words, some believe in the machiavellian conceit that it doesn’t matter what approach you use as long as the outcome is fulfilled on a regular basis, a sentiment many veteran advisers may recognise from a once popular investment type. This is different to the way the funds world is segmented by asset type and asset allocation.
As an example, looking at very old long-only equity fund managers last century, when the London Stock Exchange had a two-week accounting period, they would enhance their returns by selling stock they didn’t have at the start of the period and then buy it back at the end at a hopefully lower price for a net settled amount.
With current Mifid [Markets in Financial Instruments Directive] limits, managers of authorised funds can short sell to enhance returns by borrowing stock to sell short if the market direction is downwards. They are similar to equity or bond long/short fund managers who look to maximise, rather than enhance, the return profile whether markets are going up or down.