Absolute Return  

Economic outlook 'in keeping' for absolute return funds


The "pretty dreary" economic outlook means advisers should consider investing in absolute return funds, Jason Broomer has said.

The head of investment at Square Mile said equity markets were likely to produce lower levels of returns than they had historically.

Mr Broomer said: "The generally low levels of expectations means [equity markets] will dip into negative territory on a reasonably regular basis. One area which might start to have a slightly better outlook are absolute return type strategies and indeed even active managers should perhaps be able to produce better returns in the current environment than they were 12 months ago.

"Twelve months ago markets seemed to be moving forward based very much on momentum trends and hopefully the sell-off which we saw in the fourth quarter of last year will start to break down that trend and markets might become a little bit more discerning and a little bit more responsive to the fundamentals. That should be more in keeping for absolute return investments and indeed active managers in general."

Absolute return funds have traditionally polarised advisers on the basis many of them fail to deliver on what they are supposed to – after charges and price inflation – and those funds that do are not doing it on a consistent basis.

Mr Broomer said: "[Advisers] have been right to have been sceptical [of absolute return funds] and they have been influenced by the pretty lousy returns that absolute return funds have delivered over the past 12 to 18 months and maybe a little bit beyond that.

"If I am right and markets are becoming a bit more responsive to fundamentals perhaps we will get rid of the Brexit uncertainties that will remove political risk but there will still be an enormous amount of economic uncertainty but active managers are well equipped to deal with economic uncertainty. They are not well equipped to deal with political uncertainty."

Over the past year, 69 of the 126 funds in the Investment Associations Targeted Absolute Return sector lost money, with some losing more than 10 per cent.

Mr Broomer said markets had rallied this year because interest rate expectations had fallen which had brought forward returns, meaning returns in the future would be lower.

He said: "Growth rates seem to be on the decline ever since the financial crisis. It may be something to do with debt, it may be something to do with demographics and the ageing population in the west, but economies in the west just do not seem to be as sprightly as they were 20 years ago or 30 years ago and seem to be gradually slowing down.

"This is impacting on things like profits growth and investors' returns."

Mr Broomer said markets were "incredibly sensitive" to interest rate outlooks and if there was any sign of inflation it could prove "really very nasty" for financial markets.