Absolute Return’s 2016 losers pose new challenge to sector

Absolute Return’s 2016 losers pose new challenge to sector

Figures showing that several of 2016’s 10 worst-performing funds reside in the Targeted Absolute Return sector have reopened a debate over the products’ aim of producing positive returns in all market conditions.

In a banner year for absolute return fund flows, data from FE Analytics show City Financial Absolute Equity, Odey Absolute Return and Argonaut Absolute Return have lost between 15 and 25 per cent so far in 2016, ranking them among the worst in the UK fund universe. 

Pioneer’s Sterling Absolute Return Bond Sicav has also shed 15 per cent, although this relates to a euro-denominated share class which reflects the pound’s 2016 weakness.

The Odey fund, run by James Hanbury, aims to deliver positive returns over rolling 12-month periods. Barry Norris’s Argonaut fund aims to do so over three-year periods; its 2016 drop has pushed three-year returns into the red. Three-year figures for City Financial’s David Crawford remain healthy, despite a 15 per cent drop this year, but fund buyers have asked questions of the sector as a result of this year’s sharp falls. 

“More needs to be done in terms of investors being aware of what they’re buying,” said Haig Bathgate, chief investment officer at Tcam.

An investor in the Argonaut fund who wished to remain anonymous admitted they had got “carried away” with the fund’s historical performance. The portfolio returned almost 80 per cent in the three years to 2015 – but has shed a quarter of its value this year.

“We certainly never would have expected it to fall 25 per cent [in one year]. We have now realised there will be times when the process works and when it doesn’t. In this case, we made a poor decision,” the investor said.

All three of the struggling funds are long/short equity strategies. Mr Bathgate acknowledged that the macro events of 2016 had meant company fundamentals were often overlooked by investors, making it a difficult time for this investment style. But he questioned the funds’ habit of taking big calls.

Absolute return funds have been a rare bright spot for the asset managers amid a disastrous year for fund flows. The sector has taken in £5bn in new money this year – though inflows into the four products in question have been muted – leading to the FCA to examine the sector as part of its asset management market study.

The regulator highlighted last month in its interim findings that absolute return products typically appealed to “customers who wish to reduce the risk of negative returns”.

Jonathan Bell, chief investment officer at Stanhope Capital Management, suggested investors may be allocating to the sector’s high-risk, hedge fund-like strategies  in the belief their return profiles are similar to Gars-style multi-asset funds which sit in the same grouping.

“The warning you have to give investors is that just because something says absolute return, doesn’t mean it’s going to be low volatility or low risk. It is about how much you want your managers to speculate.”