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Absolute return funds are not letting investors down

I would imagine that with the ongoing global economic crisis, investors will be casting an eye over absolute return funds, given they aim to deliver positive returns even when stock-markets fall.

But absolute return is a relatively new sector with a chequered history. It was no surprise that marketing departments were quick to lose the target return label (as many were originally called) when it became obvious that they were setting themselves up for a fall. Funds from Credit Suisse and DWS, which were forced to close because of poor performance, immediately spring to mind.

The recent report by FE Analytics will have done little to dispel the myth that this new breed of fund continues to disappoint.

It found that in the 12 months to the end of June, only 43 per cent of funds in the absolute return sector beat inflation while 11 funds delivered negative returns.

The findings would have unnerved the hundreds of thousands of investors who have bought into the absolute return fund story during the financial crisis and recession. It might have unnerved a few advisers who have recommended the safe-haven funds too.

Investors have lapped up these funds. In 2008, there was just £1.6bn invested in absolute return funds but now there is around £18bn.

But how many investors are affected by the poor performance? Dig a little deeper into the FE Analytic figures and it is apparent that several of the big sellers are proving their worth, suggesting that most investors have steered clear of the laggards.

The biggest fund by some margin is the £8bn Standard Life global absolute return strategies. It has struggled this year but its longer-term record is first class, having returned 26 per cent over the past three years.

Another favourite, which has delivered decent performance, is the £1.9bn Newton real return. Formerly known as absolute intrepid, the fund has returned 30 per cent over three years and 55 per cent over five years.

However, there are two notable funds that have had some wobbles – Mark Lyttleton’s BlackRock absolute return fund and Jupiter absolute return managed by Philip Gibbs.

Yet investors would be acting hastily to ditch these two funds – although more than £300m has left the BlackRock fund according to FE Analytics. For five years this fund stood out – and it is still delivering a positive return. No wonder BlackRock dismisses any criticism of its short-term track record with “on an annualised basis the fund has delivered 6.7 per cent since launch”.

Such was Gibbs’ reputation that the Jupiter fund winged its way on to financial advisers’ recommended lists as soon as it was launched in late 2009 – before long it was more than £500m in size. Yet over the past year the £613m fund has fallen by 4 per cent and it is down 3.8 per cent since launch.

Gibbs argues that he has underperformed because he has been cautiously positioned, which, given the state of the global economy, might prove to be the right strategy after all.

In a nutshell, there is £18bn invested in absolute return funds, of which around £14bn is invested in four funds, a couple of which are the top two performers and two of which are managed by proven and respected managers who have had a period of short-term underperformance.

I would say the absolute return sector appears to be settling down just fine, as it already seems to be mirroring all the other IMA sectors. It has a handful of choice picks and a hefty smattering of funds that are not worth the light of day. Par for the course, wouldn’t you say?

Paul Farrow is personal finance editor at the Telegraph Media Group


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