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Adviser Fund Index

Predictions of a drop-off in interest in absolute return products have proven misplaced, according to Adviser Fund Index panellists.

Far from a fall in interest, the funds have increased in popularity, as the wealth of choice in the sector has ballooned. From the May 2008 rebalancing where the BlackRock UK absolute alpha fund accounted for over 5 per cent of the AFI cautious portfolio there has been a significant diversification across the sector.

The funds now account for over 10 per cent of the total cautious managed portfolio, suggesting either that absolute return has taken a large step towards becoming a core cautious managed strategy or the outlook for markets remains uncertain.

Hargreaves Lansdown head of research Mark Dampier says: “I think the absolute return space is important because although the market has been quite strong, clients are still incredibly nervous. They feel if they beat cash they are happy.”

Chartwell investment research manager and AFI panellist James Davies says increasingly the managers of these funds can demonstrate impressive track records.

The creation of the IMA absolute return sector in May 2008 added to the credibility of these products. and has given investors confidence to use absolute return funds as a core part of their portfolio construction.

According to the IMA, total net retail sales for the absolute return sector in 2009 hit £2.55bn.

“Perhaps the market has learnt that investors are quite intolerant of capital loss,” says Davies. “People appear to have decided that given the availability of absolute return funds they can put money there to help protect their clients’ capital. These funds are picking up flows from all of the core asset classes.”

Dampier says advisers have found the old adage that investors feel loss more than gain held true over the financial crisis.”Clients are saying they do not mind taking on a bit more risk but they want some insurance to make sure they do not suffer the 30 to 50 per cent losses they took in recent years,” he says. “The absolute return market seems to offer that.”

One point that both are keen to stress is the structure of these funds can differ greatly and the onus is on the investor to establish the individual methods that managers use to achieve their returns.

Davies says: “I am not really convinced by absolute return bond funds. You would ideally assume that fixed interest was an absolute return asset class if you plan to see the bonds through to maturity.”

Understanding the underlying process behind these funds is a cause shared by a number of AFI panellists. Beckett Financial Services portfolio manager Sam Sibley says some more adventurous strategies might not be appropriate for cautious managed portfolios.

“I would be inclined to use more macro-type funds rather than long/short for cautious portfolios,” she says. “You would not want the Octopus absolute UK equity fund in a cautious managed portfolio. You have to do your research and understand what is going on within a fund.”

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