He adds: "We don’t believe it is possible to time markets, but one can have certain investments that can offer protection against the risks that are there, and we felt for a long time that the major risk was inflation, and we feel that now as well. But for the decade or so when it didn’t happen, we had those hedges in place, including owning gold. What has changed is that in the past, that ballast in portfolios came from bonds, which provided an income, but that is not the case anymore.”
He says the present market conditions mean the equity investments in his fund have been falling in value, the hedges in the portfolio have performed well, and this is how absolute return type strategies are supposed to work.
Fallen giants
With volatility gripping the market now, absolute return fund managers may find market conditions more to their liking.
Barry Norris, who runs a fund that sits within the absolute return sector at Argonaut Capital, says this argument has some validity, but the problem is deeper.
He says most of the original absolute return funds “were run with the principle of having low volatility, and that is fine, but the problem is they also had low returns, and people invest to generate a return, and if you have a low return, low volatility product, you are essentially asking clients to pay an active management fee to get the same return as from cash”.
Tom Boyle, a fund manager on the Atlantic House Total Return fund, says: “Historically many absolute returns funds haven’t taken a great deal of risk in the belief that they were protecting investors' capital. In reality, most had taken just enough risk to impact the funds in a period of high stress. If you took the analogy of a bond, those absolute return strategies could be likened to short-duration investment-grade bonds. Not a great deal of upside, but at the same time, ultimately correlated to equity when the really bad times come.”
One of the founders of the original Global Absolute Return Strategy fund, Euan Munro, later defected to set up a similar mandate at Aviva Investors and subsequently became chief executive at that business. Other members of the founding Gars team joined Invesco and launched an absolute return fund, and those three remain the cornerstone products of the industry.
Peter Fitzgerald, who is now the lead fund manager on the £2.5bn Aviva Investors Multi-Strategy fund, the company’s absolute return product, acknowledges that many in the sector have been too focused on volatility management, saying: “There has not been enough risk taken to achieve the return target, but they hit the volatility target.”
