The differing fortunes of two of the funds in the FE Adviser Fund Index during recent turmoil threaten to reignite debate over the absolute return sector.
During the August falls in equity markets, the BlackRock UK absolute return fund, co-managed by Mark Lyttleton and Nick Osborne, saw its performance drop by 3.33 per cent over the month while the Jupiter absolute return fund, managed by Philip Gibbs, rose by 3.19 per cent.
Using one month’s performance is not intended to provide an indication of the relative success or failings of these portfolios but as an illustrative guide to how much these products tend to diverge in how they behave, particularly during times of market stress.
It is now a well-rehearsed argument that the Investment Management Association absolute return sector is a broad church that houses a plethora of strategies. Currently, funds in the sector can differ from one another by risk profile, underlying asset class, strategy, fees and time horizon. In fact, apart from the intention, although not the obligation, to produce an above-zero return over a 12-month period, there are very few features these products are mandated to have in common.
Close Asset Management portfolio manager and fund research specialist James Davies says: “It can be difficult to keep track of where a manager has their long and short positions. It takes time and effort to research outside the fund factsheets, which are often out of date by the time they are released.”
Consultation is ongoing with the IMA about reforming the sector but one possibility seems to have been largely overlooked. If the only difference between these products and the rest of the market is the time horizon, as the current sector definition suggests, then perhaps investors should be wary of putting any money behind such short-term focus.
As an example, the BlackRock UK absolute alpha fund has returned 25.02 per cent against a 5.63 per cent return from the FTSE 100 over five years to September 13 but has underperformed the index over three years, with1.72 per cent versus 6.92 per cent.
As these statistics demonstrate, picking any particular time horizon is an arbitrary and frequently unhelpful way of evaluating performance. Fiddling with how the absolute return sector is split does little to mitigate this core problem.
Asset management companies should concentrate on what differentiates these products from those that were already available. For some, it is the downside protection offered to investors while for others it offers managers the opportunity to reflect negative positions on markets or sectors, increasing risk in order to provide higher returns.
In its current structure, the existence of the absolute return sector is antagonistic to industry efforts to combat retail investors’ progressively shrinking time horizons. It has also put huge pressure on managers.
Hargreaves Lansdown investment manager Ben Yearsley says: “These managers claim to be able to produce returns under any market conditions so they should be asked to prove it. Their benchmarks are usually cash-plus, so they have to beat cash in order to justify the fees.”
Perhaps the debate should focus less on ways to paper over the problems with the sector and more on what these funds intend to deliver over the long run.
Data supplied by Financial Express