Investors pile into thriving fund sector

This article is part of
Autumn Investment Monitor - September 2015

Multi-asset products may have been garnering headlines but industry data suggests absolute return funds are also benefitting from the flight to safety, triggered by the slumps in European and then Chinese markets during the summer.

Risk-averse investors have been piling into the Investment Association (IA) Targeted Absolute Return sector, the trade body’s figures show. It was the best-selling sector in June with net retail sales of £445m and it continued to record strong net retail sales in July, totalling £322m. This made it the third best-selling category that month.

The IA reports funds under management in the sector have soared to £49.7bn from £3.8bn in 2008, representing growth of 1,208 per cent.

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A trade body spokesperson observes: “The Targeted Absolute Return sector has been one of the industry’s biggest success stories in recent years. The sector is characterised by highly innovative products that are able to use sophisticated investment techniques permitted under Ucits to target positive returns, even in falling markets.”

The category has faced criticism in the past, though, as investors and advisers questioned the term ‘absolute return’. In 2013, the IA renamed the sector Targeted Absolute Return from Absolute Return to “make sure investors do not inadvertently perceive there to be some implicit guarantee of positive returns due to the name of the sector”.

The spokesperson adds: “We also clarified the sector to make sure investors can easily find out what individual funds are setting out to do.”

More recently, concerns have been raised about the size of some products in the category, the most well known of which – Standard Life’s Global Absolute Return Strategies (Gars) – is £26.2bn in size.

In August, Morningstar issued a warning about the level of the vehicle’s assets under management and the impact this was having on its strategy, saying it was keeping a “close eye” on asset capacity.

Morningstar senior manager research analyst Randal Goldsmith warns: “With this stretched capacity, we… have seen a reduction in its ability to produce alpha.”

In spite of this, investors continue to pour money into Gars and other such offerings. Fidelity’s investment platform, FundsNetwork, reported that both Gars and the £2.9bn Invesco Perpetual Global Targeted Returns fund made it into its adviser sales top 10 in second and seventh places respectively in July.

Gars also returned as a member of the Investment Adviser 100 Club 2015 based on one- and three-year performances, having dropped out of the elite club in 2014.

Martin Bamford, chartered financial planner at Informed Choice, says these funds offer an “unappealing mix” of high charges and inconsistent returns. But adds: “The idea a manager can produce a positive absolute return when markets are falling clearly appeals to investors when markets seem to be falling.”

Ellie Duncan is deputy features editor at Investment Adviser


Martin Bamford, chartered financial planner and managing director, Informed Choice

“Standard Life Investments’ Gars has become the ‘Goliath’ of the sector due, in part, to its popularity with advisers who have struggled to justify recommendations to invest in traditional asset classes, offering only the chance for good relative returns in falling markets.