Will capacity crunch give absolute return a kicking?

Dan Jones

There is no doubting the sector of the moment, and a closer look at the Investment Association’s overhaul of its fund sales figures shows the popularity of absolute return strategies is more significant than anyone realised.

The new statistics, designed to strip out the impact of overseas investors, show Targeted Absolute Return’s run as the trade body’s best-selling sector has, in fact, lasted for twice as long as previously thought.

Add to that another month atop the rankings in April, and the sector’s now been the most popular among retail investors for five consecutive months.

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The real test, of course, is still to come: how exactly will these portfolios fare when risk assets take a prolonged turn for the worse? For now, their pledge of certainty in uncertain times is resonating.

The impact of this is everywhere you look – and I don’t just mean Jake Moeller’s comment piece in Investment Adviser.

Equity products have suffered significant outflows this year, and it is easy to make a simple connection between this and the money going into absolute return.

But as we report elsewhere this issue, fixed income products are also seeing assets switch to low-risk multi-asset products, a grouping with which absolute return has a significant overlap.

Naturally, then, these shifts are being reflected in fund launches, as more asset managers seek to launch strategies akin to Standard Life Investments’ Gars trailblazer.

These portfolios are attractive to groups for more reason than one: their go-anywhere approach means they are not as capacity constrained as other products – although the gargantuan size of SLI’s strategy has come in for criticism.

Despite this, I wonder whether parts of the sector are facing a capacity crunch.

The pattern is most evident for equity-focused portfolios, be they long/short or market neutral. This year we’ve already seen Kames and Columbia Threadneedle warn on capacity and Dalton soft-close two European products.

The amount of money flowing into the sector means they won’t be the last.

Absolute return is still viewed as a new space by some, but it’s now the third-largest sector by assets under management – bigger than both the Corporate Bond and UK Equity Income groupings.

Even if Gars’ £25bn in retail assets are stripped out, the sector’s still larger than the entire US equity sector.

Maybe we’ll soon see a change in circumstances; the UK may vote to stay in the EU and money might come back into traditional equity funds. But the backdrop isn’t exactly booming either way.

Continued flows look like a given, and we should recognise the sector’s maturity means some funds are already facing constraints akin to those seen for successful portfolios in other sectors.