Why is this important? Put simply, differing drivers of return provide useful diversification benefits and a well-diversified portfolio will likely produce much smoother performance, helping you, and in turn your clients, to sleep more soundly at night.
So what is an absolute return fund anyway?
Many investors will have a general understanding of alternatives such as property or commodities, but absolute return funds can seem a bit daunting. These are merely funds that aim to make a positive return, irrespective of the direction of the markets, and the term ‘absolute return’ is often used interchangeably with ‘hedge funds’, albeit this can have both positive and negative connotations (uncorrelated returns and high fees for example).
The universe of hedge funds and the strategies they employ are vast, but it’s important to remember why we hold them in the first place: to diversify our funds. Bearing this in mind, it is thought-provoking when you look at data over the past 20 years and find that many of these strategies are actually highly correlated to equity markets. Within the Close Managed Funds, we are already invested in managers exposed to both shares and bonds, so it is imperative that we focus our search on absolute return funds that deliver something different.
The value of research
Finding these funds is not easy – we met with 125 alternatives managers in 2019 and found just a handful that we considered adding to the Close Managed Funds. These strategies require specialist knowledge and we must be able to challenge the managers to differentiate between those that are skilful and those that are merely lucky.
Active finding its form
We began this piece by asking ourselves whether above average returns were available to clients who invest actively. We believe the answer is yes, and more so than ever during periods of heightened volatility, in which the very best active managers can move quickly to identify opportunities and manage risk. We trust that you and your clients will take comfort knowing that we continue to search for exceptional managers in a sea of ‘average’, uncovering new and interesting investment opportunities within the funds.
*FE Trustnet as at 31 March 2020.
Important informationThis article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients. The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice.