Absolute return funds should be in every client's portfolio despite dragging down performance in recent years, according to the head of Walker Crips managed portfolio service.
The service, which has assets of just more than £100m, is available only to intermediaries, and financial advisers are by far the largest client group.
It divides clients into five segments according to risk appetite.
Andrew Morgan, who jointly runs the service, said absolute return funds have a place in the portfolios of clients in virtually all risk buckets.
The sector has been a poor performer in recent years.
The average fund in the IA Targeted Absolute Return sector has returned 16 per cent in the past five years.
By comparison, the best performing IA sector over that period was IA Global which returned 87 per cent.
Absolute return funds seek to make positive returns by employing investment management techniques that differ from traditional mutual funds, in a bid to remain uncorrelated to and diversified from traditional assets. To achieve this they will often use short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets.
Mr Morgan said there is a “constant” conversation between himself, his clients, and colleagues, around whether absolute return funds should remain in the portfolios at a time when equity and bond markets are performing well.
Alan Miller, founder of SCM Private and a manager of an absolute return fund, has said most such funds are a “ludicrous” investment.
He said many absolute return managers are so obsessed with achieving low volatility that achieving a decent level of positive return is neglected.
However Mr Morgan reiterated that absolute return funds are designed not to be correlated with equity markets.
"Frankly, if equities are returning, say 10 per cent a year, I would be worried if an absolute return fund was returning anything like that. It would be a sign the fund manager is not running the money in way he is supposed to.
"Equity markets are doing well now, but whenever they do less well, I would expect absolute return funds to perform better.”
Jason Hollands, managing director for communications and business development at Tilney Group, said the term “absolute return funds” tends to cover both funds that target low volatility, and those which use derivatives and other financial instruments to achieve outsized returns, so making blanket claims about performance is redundant.
He said most of the client portfolios run by Tilney contain absolute return funds.
Such funds have come to replace traditional bond funds in recent years, Mr Hollands said.
Bonds are traditionally used in multi-asset portfolios to reduce volatility. With bond yields low and prices high, he said fixed income assets look unattractive, so absolute return funds are bought to perform the role traditionally associated with bonds.
This means clients with a lower risk appetite tend to own more absolute return funds.
David.Thorpe@ft.com
