Any comparison of absolute return funds’ performance comes with one major caveat: the range of portfolios classified under this banner is extensive. Unlike other sectors, where the IA sets out clear eligibility guidelines, the rules for Targeted Absolute Return funds are broad to the point of ambiguity.
The IA states the cohort is made up of “funds managed with the aim of delivering positive returns in any market conditions, but returns are not guaranteed. Funds in this sector may aim to achieve a return that is more demanding than a “greater-than-zero-after-fees objective.”
“Funds in this sector must clearly state the time frame over which they aim to meet their stated objective to allow the IA and investors to make a distinction between funds on this basis. The time frame must not be longer than three years.”
In other sectors, for example UK All Companies, which requires all funds to invest at least 80 per cent of assets in UK equities with the primary objective of achieving capital growth, all funds have to allocate a large proportion of the portfolio to a specific asset class and region.
As absolute return fund managers have the freedom to invest long or short, and hold any mixture of bonds, equities, and other asset classes, they can effectively have completely different objectives.
Therefore analysts and experts can be left with a feeling of comparing apples with pears. A review of the sector by the IA in 2013 brought little concrete change other than the addition of ‘targeted’ to the sector name to stave off criticism of those funds failing to stay in the black.
Performance
With this reservation in mind, Table 2 shows the wide variety of funds that make up the sector’s best performers over the past five years.
Another proviso should be mentioned here: given many absolute return investors’ desire for a lower-risk product, they are not necessarily looking for the best performing fund.
The big sellers in recent years have been Standard Life Investments’ Gars, Invesco Perpetual’s Targeted Absolute Return and Aviva Investors’ Multi-Strategy funds, all of which seek to produce steady rather than spectacular returns, so do not feature in this table. But even these strategies can go awry, as demonstrated by Gars’ dip in performance in 2017.
There are other concerns for absolute return portfolios. The opportunity cost of holding these funds has been significant: despite investor caution, markets of all stripes have continued to rise, meaning the sector has been left trailing by equity, fixed income property and mixed investment groupings in recent years.
