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Fund Review: Absolute Return


Figures from the Investment Association (IA) for April 2016 show the IA Targeted Absolute Return sector was the best-selling category in the month as net retail sales reached £742m.

Guy Sears, interim chief executive at the IA, points out the industry has now seen three consecutive months of stronger net retail sales, in part driven by continued investor appetite for absolute return funds. “In April alone we saw a continuation of these trends as net retail sales hit more than £1bn for the first time in 2016,” he says.

In a sign some absolute return funds are reaching capacity as investors pile into the sector, Columbia Threadneedle says it is “monitoring flows” into the Threadneedle UK Absolute Alpha fund, “with the potential to apply further containment measures”.

Gary Collins, head of wholesale for Europe, Middle East and Africa at Columbia Threadneedle, notes: “We have seen increased demand for this absolute return strategy in the current volatile, low-growth environment.”

In its monthly round-up for May, the Whitechurch Securities investment team observes correlations are increasing between traditional asset classes, meaning there is greater need to seek out alternatives providing diversification.

“The demand for bond substitutes is leading to a greater choice of absolute return funds that aim to generate positive returns irrespective of market conditions,” the team says.

“However, if investing in these funds it is important to be selective and understand the wide-ranging differences in the risk and reward profiles that they can offer,” it cautions.

“In these extremely volatile periods, funds such as Newton Real Return and Invesco Perpetual Global Targeted Returns have been particularly impressive in grinding out steady positive returns year to date.”


FP Argonaut Absolute Return

Barry Norris is lead manager of this £397m fund, assisted by deputy Greg Bennett, which he runs using his “earnings surprise” investment process. The aim of this strategy is to provide positive absolute returns over a three-year rolling period. The fund, which is a member of the Investment Adviser 100 Club 2015, has delivered 36.9 per cent in the three years to June 16. This placed it second across three years in the IA Targeted Absolute Return sector, which averaged 7.3 per cent. The fund lost 9.5 per cent in the past 12 months to June 16. In the vehicle’s factsheet to the end of April, Mr Norris states: “We lost money in our long and short book owing to a mix of stock-specific and macro factors.”

BlackRock European Absolute Alpha

This Investment Adviser Hidden Gem Club 2016 member is managed by Vincent Devlin and Stefan Gries and launched in March 2009. The £114m vehicle aims to gain investment exposure to equity securities of companies in the European Economic Area and Switzerland to deliver absolute returns on a 12-month basis. The fund has generated 5.3 per cent in the past 12 months to June 16, compared with the sector’s average loss of 0.6 per cent, data from FE Analytics shows.


City Financial Absolute Equity

This £322m fund seeks to achieve absolute returns by investing mainly in the UK and selectively in the US and Europe. Manager David Crawford has been at the helm since the fund’s inception in March 2008, clocking up solid returns. He identifies and invests in shares that are deemed to be mispriced by the stockmarket. Data from FE Analytics shows in the five years to June 16 the fund delivered 93 per cent, outperforming the IA Targeted Absolute Return sector’s average of just 12.2 per cent. In its factsheet to the end of April, the manager points out the portfolio remains short on “a number of oil stocks with a particular focus on shale oil companies in the US”.

But where are absolute return fund managers finding the opportunities to produce such steady returns?

Stephen Moore, manager of the equity-focused Artemis US Absolute Return fund, says opportunities to generate returns through short-selling continue to increase, having been through a challenging period.

He explains: “Shorting stocks during the period of asset inflation that has stemmed from the extraordinary liquidity injections provided by central banks was difficult. The accumulation of reserves by countries with high current account surpluses [such as Saudi Arabia] also helped to drive up the valuation of financial assets over the past 15 years.

“But the Federal Reserve seems intent on removing excess liquidity from the financial system and oil exporters have responded to low oil prices by selling assets to pay for social programmes. So the prospects for short-sellers have improved.”

Mr Moore adds: “We are not seeing the normalisation of the financial system for which some investors are hoping. The resulting gap between reality and expectations could make for a challenging outlook for long-only investors but should create opportunities for short sellers.”

In this special report