Best to invest in a plodder than a fad

This article is part of
Absolute Return – July 2016

In this case, past performance can be a useful indicator and can help investors understand how an absolute return fund performs in different market conditions. David Bint, multi-asset investment specialist at Standard Life Investments, advises investors to pay particular attention to how absolute return funds have performed during substantial market downturns.

“If investors are buying them because they think they are more secure, they should look at how they’ve behaved in the past,” he says. “These funds will often go down in market turbulence as well, they just don’t go down as much as the typical profile. [Investors] should think about the risk and how much money they could lose, because absolute return does not mean it will never make a loss.”

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Mr Bint continues: “They should also pay attention to the fee they’re going to be charged; the longevity of track record; the resources the investment management firm concerned puts behind the strategy; and the stability of the management process.”



Number of funds in the IA Targeted Absolute Return sector, according to FE Analytics


The performance differential between some of the best- and worst-selling absolute return funds, year to date

Darius McDermott, managing director at FundCalibre, agrees: “There are two very important considerations: look at the historic volatility; and look at the drawdown.

“One of the reasons people invest in an absolute return fund is to have some protection when markets fall – an insurance policy, if you like. The biggest sin of this type of fund would be to be down as much as the market. And look at its correlation to equities and bonds.”

Distinguishing between those absolute return funds that are genuinely doing what they set out to achieve and those simply following the direction of the market is key to choosing the right fund for a portfolio.

Rory Maguire, managing director at Fundhouse, cautions: “Be aware of funds that do well in a bull market, for example, and be drawn to those with modest returns in rising markets. We would also aim to find funds that have been tested in tough market environments – again, this separates out the faddy funds from the long-term plodders that we like. Being sceptical of new launches that appear to solve a current need would be a good rule of thumb.”

Fund Picks: Expert View

Darius McDermott, managing director at FundCalibre, selects his three favourite funds, one each from three categories of absolute return fund – long/short equity; market neutral long/short equity; and a multi-strategy or Gars-style product:

1) Henderson UK Absolute Return

2) Old Mutual Global Equity Absolute Return

3) Church House Tenax Absolute Return Strategies