Talking Point  

Absolute returns will diversify against a recession

Absolute returns will diversify against a recession

Absolute returns funds can be useful as a diversifier against a sell-off in bonds or equities, the wealth manager has said.

Ben Gutteridge, head of fund research at Brewin Dolphin, said that in the current climate, these funds might not be seen as that successful, because equities are on the rise. But if the market turns, and there is a serious recessionary environment, then they will come into their own.

He said: "In the short term, it's not obvious that absolute return funds are doing much on diversification, because they have an optimistic view of the world."

While equity markets are going up, they would not be expected to do that well, he said.

In addition if there is short-term volatility, then an absolute return fund may not help investors that much either.

"But if you move into a recessionary type bear market, absolute return funds would be able to use their flexibility.

"We would expect equities to be volatile but upward trending in the next 12 to 18 months. If we move into a situation where we have a recession, we hope that absolute return funds will make money by moving into a short equity position."

Absolute return funds can work when equity markets are on the downturn, because they have the flexibility to short stocks.

"I wouldn't overstate the idea that bonds have lost their diversification benefits, but there are concerns where bonds and equities could sell off together and in that environment absolute return funds do offer some diversification benefits.

"An example would be a quite severe inflationary shock, and interest rates have to move a lot faster than expected. Absolute returns funds are able to short equities and short bonds and make money out of that."

Both bond and equity values have been moving in an upward direction in the last few months, due in part to doveish statements by central banks, when otherwise bonds typically act as a defensive stock against rising equities.