Best to invest in a plodder than a fad

This article is part of
Absolute Return – July 2016

Best to invest in a plodder than a fad

The most important consideration when investing in absolute return is, naturally, selecting the right strategy for your portfolio. There are 103 funds in the IA Targeted Absolute Return sector, according to FE Analytics, which means a great amount of choice.

These funds vary in the techniques they use to achieve their objectives and in the level of risk and return the manager targets, which in turn leads to a wide spread of returns from the sector’s constituents.

As Fergus McCarthy, head of UK & Ireland intermediary distribution at BNY Mellon, reveals: “There is a perception among investors that these funds should be safe havens in times of volatility.

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“However, an analysis of the returns from some of the best-selling absolute return funds year to date reveals a performance differential between the best- and the worst-performing funds of nearly 15 percentage points (-8 to 7 per cent), so advisers have to do their research to ensure they get the outcome they want for their clients.

“This choice is further complicated for advisers by deciding which type of absolute return fund they want to use, with terms like long/short, global macro and market neutral being used readily as descriptors.”

Comparing absolute return funds: Expert Views

Jake Moeller, head of UK and Ireland research at Thomson Reuters Lipper, says:

“This sector is one of the most heterogeneous sectors in the UK consisting of funds with equity, alternative, long/short, bond and mixed-asset mandates, to name a few. The best way for investors to compare funds is to ensure they are comparing like with like. Sometimes the clue is in the name – for example the Royal London Absolute Return Government Bond fund should not blindly be compared with the Polar Capital UK Absolute Equity fund. Investors should look at volatility outcomes and think about comparing these funds by high-, medium- or low-risk buckets and look at drawdown. This can paint a picture of composition without having to trawl through each individual portfolio.”

Adrian Lowcock, head of investing at Axa Wealth, applies a similar method:

“The best approach is to identify the types of funds you want and then pick out each fund which ticks that box and compare this sub-set of funds. It is a laborious job but one that is essential if you are to get the right type of fund for your portfolio. When comparing performance, consider the fund’s objectives and take a long look at downside protection as this is a big part of many of these funds’ objectives. Consistency of performance is also an important consideration.”

Adrian Lowcock, head of investing at Axa Wealth, suggests investors approach choosing an absolute return fund by deciding what it is they are looking to achieve or by considering what is missing in their portfolio.

“Are you looking to add a bit of capital preservation to your investments or perhaps concerned about bond prices and want more flexibility in how returns are generated from that asset class?” he asks. “Once you have decided what you want, you need to decide what type of risk you are willing to take with it. Absolute return funds are a hotchpotch of different objectives and strategies.”