The rise and rise of the IMA absolute return sector had an unexpected setback in August as record retail outflows checked its progress.
In August, the sector saw net retail outflows of £122.1m, only the third monthly outflows since the sector was launched in April 2008. Indeed, the August figures were more than three times its heaviest previous monthly outflow in January this year.
What is significant is that this money was pulled out in a month that saw global equity markets fall sharply. The MSCI World index dropped 6.55 per cent in sterling terms over the month, erasing any gains made earlier in the year. The question it begs most of all is how far the sheen of these funds has waned over the past three years.
Chelsea Financial Services and FE AFI panellist Darius McDermott says: “In the retail space you have to remember that, in 2008, markets were in freefall and funds like the BlackRock absolute alpha provided a positive return. It was this differential that would have turned investors on to the sector.”
Ironically, August was a stark reminder of the value of downside protection with the sector dropping only 1.65 per cent.
This, however, fails to tell the whole story. The problems investors have faced with these products is the divergent performance of portfolios in the sector.
For example, in the past six months, the top-performing fund in the sector was CF Eclectica absolute macro which rose by 13.31 per cent while CF Odey UK absolute return lost 12.46 per cent over the same period.
Rowan Dartington head of collectives research Tim Cockerill says: “My immediate thought would be, have the outflows been spread across the sector or have they been focused on particular funds that have performed poorly. I think there is a broad sense of disillusionment with the sector.”
Of course, one month’s outflows do not in themselves undermine the case for such an approach. In fact it could be argued that these outflows are a sign of the efficient working of the sector as it has now reached sufficient size and maturity that investors are able to trade in and out of it.
McDermott says: “The sector has grown quickly over recent years and is now more mature. It could simply be that investors are moving out of funds they have found disappointing for better opportunities elsewhere.”
With the increase in the number of available options for these types of strategies it is perhaps unsurprising that some money would move elsewhere.
The arrival of strategic bond funds has offered a different take on the absolute return theme. Its success was demonstrated by breaking the cautious managed sector’s five-month run to top the IMA’s sales charts in April and May this year.
Elsewhere managers in traditionally long-only sectors have been employing hedge fund-like techniques to protect their portfolio and add value for clients.
These innovations look set to grow their presence as they become better understood and implemented. As they do it could fundamentally change the expectation of investors across the board about the role asset managers can play not only in providing investment returns but protecting capital during difficult market conditions.
What the setback should serve as is a warning shot across the bows to get the sector definition consultation with the IMA moving at a much faster pace than it currently appears to be. In this case both investors and the asset management industry’s interests should be wholly in line.
Cockerill says: “Perhaps the main problem facing some of these funds is one of expectation. If that has not been fulfilled a lot of investors will be happier simply holding on to cash.”
Data supplied by Financial Express