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Back and beyond

As absolute return funds hit a sweet spot, Chris Salih wonders if the funds are back for good this time

Absolute return funds have once again become a popular choice for IFAs in recent months.

According to Investment Management Association figures for December 2009, net retail sales of absolute return funds reached £511m, meaning the sector was the most popular that month. Perhaps more importantly, it was the second most popular sector for the whole of 2009, taking in £2.5bn.

This figure may be some way off the £6bn placed in corporate bonds, but with demand for the latter slowing down, are we about to enter a sweet spot for absolute returns given the split opinion on the direction of the markets?

Concerns remain, of course. By definition, absolute return funds must aim to deliver a positive return in a 12-month period. And there are two things to point out when looking at recent figures. First, while 27 of the 29 funds with one-year track records outperformed in the last 12 months, the discrepancy between the best performer, Octopus Partner absolute return, and worst, EFA absolute return portfolio, was more than 35 per cent, according to Morningstar.

Second, if you measure the performance against that of 2008, not all the funds managed positive returns during the economic downturn. Newton alternative assets was the worst performer, falling 22.26 per cent.

Cazenove managing director of specialist investment management Robin Minter-Kemp says while the availability of absolute return funds in the Ucits III mantra means they are in favour right now, he warns mistakes can easily be made.

He says: “These products have come at a time when investors are yearning for an investment structured to protect on the downside by investing in a diversified range of asset classes. The last time they had something of that ilk was with-profits.

“But there are fears, as seen by what happened in 2008, that some managers turned the funds almost into long-only equity vehicles, only to be burned by the financial crisis.”

Meanwhile, absolute return funds continue flooding into the market. Philip Gibbs’ Jupiter fund was the biggest absolute return launch of 2009, taking £244m in its pre-launch period alone, and Mark Lyttleton’s £1.8bn BlackRock UK absolute alpha goes from strength to strength, reporting an 8 per cent return last year.

Skerritt Consultants head of investments Andy Merricks believes the experience of the manager is an important factor but feels some of the funds are overcomplicated.

He says: “You need to recognise that the majority of the funds only really succeed when markets are volatile. When markets do reasonably well they tend to fall back, and if they underperform we start to see complaints again.

“They must be simple and run by experienced managers – products like funds of absolute return funds are unlikely to work. The tried and trusted will get support.”

Advisers have also strongly supported a clean-up of the sector, given the mish-mash of different funds and what is seen as a fine line between absolute return and multi-asset vehicles.

Hargreaves Lansdown senior analyst Meera Patel says this is a conundrum IFAs may have to live with as the sector continues to grow, and that they may struggle to kick the tyres of all the varying funds.

“You cannot compare a Japan absolute return fund with a UK absolute return as they are two completely different animals. You do need something to compare the funds with, but that is a problem that is difficult to solve. I think we will end up seeing IFAs going down the multi-manager route as opposed to going under the bonnet of these funds.”


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