Targeted Absolute Return funds have been the best-selling sector in the Investment Association (IA) universe for nine of the 12 months to the end of February 2017.
That month did see a shift in sentiment, with the IA Mixed Investment 40-85% Shares group stealing the crown, but Targeted Absolute Return funds still recorded £129m of net retail sales to remain in fifth place.
The popularity of the sector can at least be partly attributed to the global economic and geopolitical uncertainty, both last year and for the future now that Brexit has been officially set in motion.
However, while investors are looking for a solution to offset higher volatility while producing returns, the choice of more than 100 funds in the IA sector can be both a good and a bad thing.
The range of strategies, including equities, bonds, quantitative strategies and multi-asset, means there should be a product to suit most clients. The downside is in comparing totally different funds that sit in the same peer group.
For the 12 months to April 7, the best-performing fund in the sector is the Polar Capital UK Absolute Equity vehicle, which delivered 23.1 per cent in sterling terms, data from FE Analytics shows. The second best performing vehicle is Schroder ISF Asian Bond Absolute Return with a 16.8 per cent return over the period.
The top two funds span completely different asset classes and regions, meaning investors need to work harder to ensure they choose the right strategy.
That said, the underlying theory of absolute return funds – to deliver a return regardless of market conditions – is likely to continue to appeal.
Mike Bell, global market strategist at JPMorgan Asset Management, explains: “Risk-adjusted returns for a traditional balanced equity and bond portfolio have been very strong over the past few years.
“As we get closer to the end of this economic cycle, returns from traditional assets are likely to fall and volatility is likely to rise, meaning risk-adjusted returns could be lower.
“In this environment, it probably makes sense to seek exposure to a mix of assets that can provide a lower volatility than equities but that can still deliver attractive positive returns.”
Mr Bell continues: “Investors should not rely solely on a negative correlation between stocks and bonds for diversification as this relationship cannot always be relied on when it is needed most, such as in August 2015.
“Funds that can use sophisticated strategies – such as options and shorting – have the potential to protect against portfolio downside and can aim to make money without simply relying on equities or bonds rising in value.”
Meanwhile, Jack Loudoun, portfolio manager at Vontobel Asset Management, suggests the new normal for markets is one of high correlation, near full valuation, and painfully low implied and realised volatility.
“Absolute return-type strategies allow investors to navigate the difficult macroenvironment, to seek out the best global opportunities undiversified from traditional asset classes,” Mr Loudoun says.