Absolute Return  

Investment advisory sector still divided on absolute return funds

Investment advisory sector still divided on absolute return funds

It has been likened to Marmite by one adviser, while one investment expert describes it as "a dark art" in investing.

Indeed, absolute return funds have polarised the investment advisory sector for many years.

Cynical attitudes towards them have not been helped by recent headlines about Standard Life Aberdeen’s (SLA) Global Absolute Return Strategies (Gars) Fund, which has shed assets as performance has fallen.

According to Morningstar data, the total net assets of Standard Life Investments Global Absolute Return Strategies has fallen by 28.2 per cent to £16.2bn over the past year.

So is this a sign that absolute return funds are going out of fashion?

The premise behind them is that they have a wide range of tools in their toolbox to use to their advantage depending on the market environment.

Emma Saunders, a research analyst at Rathbones, said: “Absolute return funds have the potential to make returns over different stages of the market cycle by participating on the upside when markets are strong, but also have the flexibility to rotate the portfolio into short positions or derivatives for protection during periods of equity or credit market stress.

Key points

  • Absolute return funds have polarised the adviser sector.
  • They grew in popularity following the financial crisis.
  • They tend to be at the expensive end of the investment sector.

“They do this by taking long and short positions across different asset classes and derivatives, and may use these tools to capitalise on relative value opportunities. 

“Typically, these funds have risk parameters embedded in the process, so even during periods of strong market performance, participation on the upside can be to varying degrees. However, the capital preservation mindset is typically at the forefront of any objective and therefore the resulting return profile should be uncorrelated to equity markets with a low beta over the long term.”

History

They have been in existence for some time but grew in popularity in the wake of the 2008 global financial crisis.

Historically, investors have depended on a diversified portfolio of traditional asset classes to provide protection during periods of equity market drawdown.

However, the financial crisis highlighted the risks of this approach, whereby the market saw credit securities suffer alongside equities, Ms Saunders said.

She added: “We saw an increase in demand for strategies with a low correlation to equity markets that can provide the benefits of diversification that investors seek in periods of market stress.”

Charles Hovenden, portfolio manager at Square Mile Investment Consulting and Research, explained: “Lots of people jumped on the bandwagon and it has been a mixed experience thus far. One of the problems has been that there have been very few tests in stock markets for investors in recent years.”

What advisers like

Advisers who favour absolute return funds say this is because they can be a useful tool in building a diversified portfolio, according to Adrian Lowcock, head of personal investing at Willis Owen.