Brooks Macdonald’s Jon Gumpel has called for the Investment Association (IA) to cap the level of volatility of funds in the Targeted Absolute Return sector.
Mr Gumpel, lead manager of the £351m IFSL Brooks Macdonald Defensive Capital fund, acknowledged some of the criticisms thrown at absolute return funds recently were fair, such as not enough consistency across the funds in the sector and too much volatility.
But he said he did not understand why the IA doesn’t put a cap on volatility, citing anything above 10 as an example of an appropriate cap, although he accepted the “wide variety” of strategies in the sector was good.
The recent underperformance of Standard Life’s £24bn Gars fund has drawn attention to the sector again but this has not deterred investors from piling into absolute return funds amid ongoing global political and macroeconomic uncertainty.
The IA reported its Targeted Absolute Return was the second best-selling sector in March 2017 as it clocked up net retail sales of £381m, while the sector can boast 13 consecutive months of positive net retail sales going back to March 2016.
Mr Gumpel suggested for a fund in the IA Targeted Absolute Return (TAR) sector an optimum performance level was a return above 3 per cent and volatility level below 6 and questioned whether those absolute return funds generating returns below 3 per cent were worth it.
A spokesperson for the Investment Association commented: “The primary purpose of the IA sectors is to serve the needs of consumers and their advisers. We listen to all industry views to ensure that they remain fit for purpose and reflect the wide range of products the industry has to offer.
“The TAR sector collectivises funds that aim to deliver positive returns in any market conditions. Amongst other things funds may use different benchmarks, manage to different timeframes and present different risk characteristics.
“The TAR tool we provide on our website includes the regulatory measure of volatility (SRRI), which offers consumers and their advisers the opportunity to filter which funds are appropriate to their risk appetite.”
The IA launched the Volatility Managed sector in April this year “to reflect the advent of more outcome focused products and those managing returns within specified volatility parameters”.
Mr Gumpel explained if he had to think about a volatility target when managing his portfolio, he would be shackled.
But Martin Bamford, chartered financial planner and wealth manager at Informed Choice, who has criticised absolute return funds in the past, said the cap was a “good suggestion and stricter criteria are needed for inclusion in the sector”.
He added: “Too many funds remain in this sector which consistently fail to achieve their objective of a targeted absolute return. Their presence in the sector risks misleading investors, especially for funds with a relatively short-term performance track record.
“It’s important that sector criteria doesn’t deter innovative investment strategies which are genuinely attempting to generate an absolute return, but for comparison purposes at least, funds in a particular sector should operate within defined boundaries.”
The manager urged the Targeted Absolute Return sector be “cut some slack” and pointed to the five-year performance of the sector as a whole which he said had added value over the period and had produced better returns than money sitting in a building society account in that time.
Mr Gumpel also turned his attention to the regulation of the industry which he believed was making it harder for “smaller players”, which he classified as those firms sub-£1bn in size.
He said “regulatory overload” was the biggest issue for the asset management industry but reasoned it was not the fault of the UK regulator but more the global regulations which are coming through.
He warned it “will eventually drown the industry” and the smaller players will be first, stating most firms needed to be £5-£10bn in size to survive.
eleanor.duncan@ft.com
