After a series of high-profile outflows, deeper questions are being asked about the performance of absolute return funds.
The sector, which is celebrating its 10th anniversary this month, is broad and can include a variety of types of funds across asset classes, geographies and strategies.
The Investment Association simply stipulates funds within the sector must be managed with the aim of delivering positive returns in any market conditions; asset selection is at the discretion of the manager.
In 2013, the IA updated the name of the sector to Targeted Absolute Return, but many investors are still confused over how to pick funds in the space.
Hargreaves Lansdown senior analyst Laith Khalaf says: “What is important is what the fund does and explaining that clearly. That is what investors need to focus on.
“There’s a case for having a sub-sector within the sector but then it gets to a point where you’re proliferating sectors and things get confusing. What the focus should be on is what the fund is trying to do, how it is going about it and how successful it has been in achieving those goals. You can do that rather than referencing across the sector.”
Chelsea Financial services managing director Darius McDermott says: “I don’t care if a manager uses emerging market debt, long/short equity or trades bonds. It’s about how much alpha you are trying to get versus how much risk you are prepared to take.
“There are many different instruments in the sector so we simplify it into what the target return is and how much volatility you take on. When markets are difficult we find evidence to deny or support whether the fund has done what it says.”
The sector is clearly a popular choice with advisers and investors. In fact, some of the largest funds by size across all sectors are in Targeted Absolute Return. The £19.9bn Standard Life Investments Global Absolute Return Strategies fund, £12.4bn Invesco Perpetual Global Targeted Returns and £10.9bn Old Mutual Global Equity Absolute Return fund all sit in the sector. Despite this, February this year saw net retail outflows reach £148m.
One fund that has seen significant outflows in recent months is Gars as Aberdeen Standard Investments tries to stem the flight of assets.
Aberdeen Standard’s multi-asset investing investment specialist Christopher Nichols says: “It is worth remembering that Gars is a product designed to perform over a three-year time horizon and we’re confident that the underlying trends we have identified will bear fruit for the fund in due course.
“Given multi-asset remains a fast-growing market segment and the strength of franchise ASI has established in this field, it’s not unreasonable to assume a return to a more normalised flow profile over time.”
Funds in the sector must clearly state their objective and timeframe over which they aim to meet it, although this cannot be longer than three years, according to the IA.
The IA also provides monthly figures for each fund in the sector, which show how many times a fund has failed to deliver returns greater than zero after charges for a rolling 12-month period.
The data shows three funds – Absolute Insight Currency, Kames UK Equity Absolute Return and Threadneedle Absolute Return Bond – have seen 24 successive negative periods, though they may still have met their target before charges.
However, not all funds in the sector are performing poorly. The Polar Capital UK Absolute Equity fund is the top performer over the year to the end of March, returning 37.8 per cent over one year.
It is difficult to compare the sector as there are so many types of funds with different geographic focuses. For example, the Old Mutual Global Equity Absolute Return fund’s asset allocation is vastly different to the Polar Capital fund. OMGI’s head of global equities Ian Heslop attributes the fund’s recent positive performance to a multitude of reasons including strong contributions from the consumer discretionary and technology sectors. In Q1 this year, the fund has seen positive returns from Asia Pacific, Europe and North America but Japan’s contribution was negative.
Khalaf says: “It’s not a sector you can slice and dice. You shouldn’t use a sector average of how it’s doing as it’s really just an average of a mishmash of numbers, and within that are a lot of different strategies at play.”
Hargreaves Lansdown only features one fund from the sector in its Wealth 150 list of fund picks, the Newton Real Return fund. “We have funds that are similar to it but just don’t sit in the Targeted Absolute Return sector. The Pyrford Global Total Return is similar in that it is conservatively managed but sits in the Flexible sector,” Khalaf adds.
McDermott says: “It is not easy to say ‘here are the three things you should look at’, so we look at how much return you are trying to make, how much risk, and volatility targets, and then have they physically done it when markets are weak or strong. If we find all that, then we consider them for our buy list.”
Some [absolute return funds] are remarkable in capturing all of the downside and none of the upside – they have morphed from what seemed like a half decent proposition to a bit of a dog. I fear some of us, myself included, were trying to be a bit too clever for our own good. It makes With Profit funds seem like good value for money, which ironically, they still are. Shame they were effectively regulated out of existence to all intents and purposes. We’ve had a few clients express dissatisfaction in recent months, but the notion of letting things recover only goes so far.