Outflows continue for absolute return funds

Of those £3bn, £1bn was redeemed from the funds in December alone, according to data from Morningstar.

Despite heightened market volatility in January this year, the outflows persisted, with £81m withdrawn from the funds in the first four weeks of the year.

The funds are designed to provide positive returns in all market conditions, normally investing across a range of assets and derivatives to achieve a set level of return.

Net flows in the absolute return fund sector January 2021- January 2022

Source: Morningstar

Invesco’s Global Targeted Returns Fund saw the highest net outflows in 2021, with £4.9bn being withdrawn.

The £1.2bn fund has returned 1.34 per cent over the past three years and -0.51 per cent over the past year, according to the latest factsheet.

However, investors plugged a net £2mn into the fund in January this year.

Funds with highest outflows in 2021

Source: Morningstar

When looking at the group’s performance, Schroders’ ISF Emerging Markets Debt Absolute Return Fund saw the lowest returns in the year to January 31 2021, posting a -6.37 per cent return.

The fund suffered outflows of £331m last year, though £9m was invested in January.

Performance of top 10 absolute return funds with highest outflows in 2021 (12 months to February 1, 2022)

Source: Fe Fundinfo

Uni-Global’s fund saw the highest level of performance last year, returning 9.37 per cent to investors, however it suffered redemptions of £29.6m in January alone.

Advisers turn away

Research from Aegon in October 2020 showed three quarters of the 251 financial advisers polled avoided complex investments altogether, with 51 per cent saying they were reluctant to recommend them due to confidence in their ability to deliver on their objectives.

A number of absolute return and complex products had launched following the 2008 financial crisis, including the Standard Life Global Absolute Return Strategy.

GARS was once the largest fund in the UK market, with £20.7bn of assets in February 2018. Its size halved in 18 months, and at the end of last year it managed £2.4bn.

I honestly struggle to see their role.Philip Dragoumis

Richard Whitehall, head of portfolio management at Aegon UK, said he was not surprised advisers were turning their backs on the complex investments.

“While they’re aiming to do very different things, looking at the risk and return profile of absolute return strategies alongside simpler, multi-asset portfolios, what worries me is the dispersion of returns and risk in the sector.

“It’s my belief that today’s investors are a great deal more cost conscious and want to see value for money from their investments. At this point in time, it’s hard to see this coming from complex investments.”

Philip Dragoumis, director at Thera Wealth Management, said for those who believe in evidence-based or passive investment philosophies, these funds have no place in their portfolios.

“They are actively managed across a host of asset classes, so the manager is a jack of all trades and a master of none.

“I honestly struggle to see their role.”

He added the growth drivers in a portfolio should be equities while bonds were there to reduce volatility and a hedge against a crash . 

“Everything in between is just return free risk.”

Tom Skinner, financial planning director at Barnaby Cecil, said he was initially excited by a number of absolute return funds that launched around 2005, but over time noticed the concept of the funds was not specific.

"The term can cover a wide range of different types of strategies with varying risk, and it meant you had a very wide range of outcomes which is the last thing you want as an adviser," he said.

He recommended that if investors do want to invest in absolute return funds, they should do their research.

"If you buy a FTSE 100 tracker, the name on the tin tells you what you're buying.

"But absolute return funds are complex and there is a wide range of outcomes."

sally.hickey@ft.com