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Adviser Fund Index

Absolute return funds saw a drop in sentiment at the last rebalancing as market confidence grew but there are signs this is changing.

In November, a large number of absolute return products found themselves ejected from Adviser Fund Index portfolios. Of course, these funds can hardly be called a homo-genous group and the reasons for their exclusion will be numerous. Nevertheless, the overall message is that a number of panellists feel the protection offered by these types of pro-ducts during the worst of the crisis is no longer as vital to produce returns.

Chelsea Financial Services head of res- earch Juliet Schooling says: “Absolute return tends to increase its appeal during times of market uncertainty.”

Sceptics of the meteoric success of the sector held that signs of a recovery in equity markets would put a damper on the sales. As these products aim to take only a portion of the upside of markets in return for reduced volatility, the temptation for greater returns elsewhere was going to prove too popular.

As testament to the popularity of these products, the Investment Management Association absolute return sector was the second- highest selling sector in 2009. Over the year, it saw £2.55bn of net inflows, taking more than £500m in December, in spite of sharp equity market rallies.

Despite this evident popularity, the sector has come under pressure from growing confidence in equity markets and from some mixed performances from underlying managers. This could help explain why some of the earlier enthusiasm waned as investors went into the November rebalancing.

Hargreaves Lansdown investment manager Ben Yearsley says: “Last year was an odd one for absolute return funds. It was a split year in terms of performance, with a poor time for many funds up to September but a strong end of the year.”

So far, 2011 has provided ample oppor-tunity for these funds to start proving their worth once more. Persistent problems in the eurozone are far from resolved and earthquakes in New Zealand and Japan have provided plenty of reasons for concern within and outside financial markets.

Investors might have expected absolute return funds to provide a degree of protection from these market hits but few will be reassured by the sector’s anaemic return of 0.04 per cent. However, broader fears over the trajectory of equity markets could tempt some investors back into these products in May.

Schooling says: “There is a lot of uncertainty out there. Problems in the eurozone were known about but the situation in Japan has really come out of left field.”

If the sector demonstrates its resilience in the next few months, then the case to invest will become all the more compelling.

A poor 2010 may not have been a disaster for these types of products but it should certainly give investors pause for thought.

Yearsley says: “It will be interesting to see how they perform in this type of market with everything falling. Investors are already looking at these funds with a higher degree of scepticism than they have in the past. A lot of people have had their fingers burned.”

Whatever happens in the next few months, volatility across asset classes is set to be a defining characteristic of 2011. How panellists chose to protect themselves in the May rebalancing with a whole swathe of potential options available to them will likely define the course of the three benchmark AFI portfolios this year.


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