Absolute return versus multi-asset investing
Cherry Reynard looks at the differences in approach between absolute return and multi-asset funds
The purpose of multiasset investing is to preserve capital and improve returns for investors over the long term. In this respect, they seem similar in their aim to absolute return funds but the investment approach can look very different. In many cases, these two types of fund will be vying for the core of investors’ portfolios. How do they compare?
The lines are certainly blurred between absolute return and multi-asset funds. For example, absolute return funds tend to have a cash benchmark approach but this doesn’t mean that all funds with a cash benchmark will necessarily be found in the absolute return sector. It also doesn’t mean that all absolute return funds are necessarily multi-asset.
With that in mind, where are he similarities between the two approaches? Multi-asset absolute return funds and multi-asset funds listed outside the absolute return fund sector will tend to be invested in the same assets. Most will have a weighting in fixed interest and equities, with additional holdings in alternatives, commercial property, commodities or cash.
However, the absolute return sector encompasses a far broader range of investment approaches.
Even if their ultimate goal is the same - positive returns over a given time period - many will aim to achieve it through single asset strategies such as equity long/short or fixed interest.
Both approaches will tend to prioritise risk-adjusted returns rather than just returns. Multi-asset funds of all types will blend uncorrelated assets to keep volatility low. This is also true of the single-asset funds within the absolute return sector, many of which claim - although have not necessarily succeeded in achieving - equity-like returns for bond-style volatility.
At times, the benchmark will be the same. The Cazenove diversity fund is one of the larger and most obvious examples. It sits in the cautious managed sector and yet has a CPI + 4 per cent target performance. That said, the majority of the multi-asset funds will be benchmarked to their peer group or to a composite fixed income/equity index.
There are significant differences. In theory, the absolute return sector offers more scope to take extreme asset allocation positions to ensure capital preservation. Certainly, multi-asset funds within the managed sectors will be constrained by the need to stay within sector limits and many are popular precisely because their asset allocation is predictable.
For example, Cazenove multimanager range co-manager Robin MacDonald says: “Our diversity fund has a neutral position of one-third equities, one-third fixed income and one-third alternatives. That split allows us a lot of flexibility - in fixed income we could be 100 per cent cash or 100 per cent high yield and we allocate right across the spectrum. However, we tend not to operate at extremes. Our equity allocation will not swing between 20 per cent and 60 per cent and that has been quite fundamental to the fund’s popularity.”
Funds outside the absolute return sector will also tend to be more market-directional. Over three years, the absolute return sector is up 9.1 per cent, while the cautious managed sector is up 11.4 per cent. The latter has benefited more from the recovery in equity and bond markets whereas funds within the absolute return sector are often trying to achieve a market neutral position. The difference is clearer when looking at discrete years. In 2008, the absolute return sector fell just 3.65 per cent, while the cautious managed sector fell 15.8 per cent. In 2009, the cautious managed sector rose 15.9 per cent, while the absolute return sector jumped 8.6 per cent.
As a result, multi-asset managers outside the absolute return sector will tend to look at expected out - comes rather than a year in, year out positive return. 7IM balanced fund manager Alex Scott says: “We use a composite benchmark as part of our strategic asset allocation. We project long-term expected returns so advisers and their clients can see the central case scenario. They know how our fund will perform in different market climates.”
Why do funds launch in one sector or another? In some cases it will be marketing considerations. The cautious managed sector, for example, has consistently been among the most popular sectors.
It brought in £154m in net retail Isa sales in April, while absolute return brought in just £26m. Sales in the absolute return sector has been surprisingly resilient given the strength of equity and bond markets, but more recently has been tainted with accusations of poor performance and complexity.
Advisers appear to be more comfortable with the more familiar managed sectors.
Also, the managed sectors tend to fit more neatly with advisers’ risk systems. After the RDR, more advisers will outsource their investment management and will be seeking the right risk-adjusted portfolios based on clients’ risk assessment. The risk profiling systems will usually direct people to a balance of equities, fixed interest and assets such as property or alternatives. Funds within the managed sectors are more likely to offer this than absolute return funds.
There are significant differences. In theory, the absolute return sector offers more scope to take extreme asset allocation positions to ensure capital preservation. Certainly, multiasset funds within the managed sectors will be constrained by the need to stay within sector limits and many are popular precisely because their asset allocation is predictable
Many managers have not wanted the restriction of absolute return. Artemis, for example, launched its popular strategic assets fund into the cautious managed sector. It said at the time that while the fund was trying to generate positive returns consistently manager William Littlewood did not want to suggest that it would generate a positive return in all market conditions.
Thames River Capital joint head of multi-manager Gary Potter says: “The Artemis fund looks to protect investors on the downside and it has done a good job of it. It could easily sit in the absolute return sector.”
This could equally be said about a number of multi-asset funds. They could sit in the absolute return sector but for reasons of marketing or investment approach have chosen not to. Ultimately, the aim and even the outcome may be the same between multi-asset and absolute return, but there are significant differences in approach.