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Casting doubt

M&G managing director global sales Jonathan Willcocks has questioned the demand for absolute return funds.

Willcocks believes only cash can offer a positive benchmark return in all market conditions and while 2008 was supposed to be a good environment for absolute return products, a number of them failed to deliver.

He says: “These products should deliver over all timeframes and if they fail in a market like last year’s which was ideal for them, then it is clear they still have questions to answer.”

Willcocks is the latest in a line of people to question their place in an investor’s portfolio, particularly as the remit does not always match the return.

Figures from TrustNet show 52 funds looking to produce absolute returns in any given market. And while Octopus Partner absolute return saw a 39.9 per cent return in the past 12 months, at the other end of the scale the SVM UK opportunities fund lost 29.1 per cent over the same time period.

Schroders head of UK retail Robin Stoakley says he would not rule out launching an absolute return fund but affirms the view that only cash can produce positive returns in all market environments.

He says: “The problem is that if you take out beta, much of it depends on fund managers making the right call on parts of the market. There are also questions on how these products react when the market turns.”

A turn is what we have seen in the past three months, with the SVM UK opportunities fund up 34.4 per cent in that period, while the biggest faller was Marlborough ETF absolute return, down 3.1 per cent.

If these figures are to be believed then the theory that Ucits III powers have led to increased options and flexibility for fund managers and, more importantly, have resulted in better performance for clients, has not come to fruition.

But if you compared the 26 per cent fall in UK all-companies with the 4.9 per cent rise in the UK absolute return sector in the last 12 months, the premise actually appears to have worked, with flagship funds like BlackRock UK absolute alpha generating huge IFA demand and the fund now standing at £1.5bn.

BlackRock managing director Alex Hoctor-Duncan believes there will be up to 100 funds in the absolute return market in the next few years and that the sector could grow to £10-15bn in size.

Hoctor-Duncan points to research by BlackRock showing that, over 5,000 trading days between 1987 and 2007, the average annual return was 7 per cent. However, if you missed out the best 50 days your annual return would be zero, and if you were out of the market for the worst 50 days your return would be 20 per cent.

He notes: “The advantage of absolute return funds is they can offer investors a chance to avoid timing the market, which no one in the world can do well all the time.”

With experienced managers like Tim Russell and Roger Guy entering the space and more funds set to follow, has the attitude towards absolute return funds finally turned a corner? Has the scepticism over a product that would not “shoot the lights out” in a bull market been countered by what has been seen in more established sectors? For instance, UK equity income saw the average fund fall around 25 per cent in 2008.

Hargreaves Lansdown investment manager Ben Yearsley says: “As time goes by, advisers are beginning to trust these products far more, particularly those run by experienced names like Mark Lyttleton and Roger Guy. If these things can live up to their billing and hit targets like 10 per cent per annum then I cannot see why these funds should not form the core of an adviser’s portfolio.”

Informed Choice managing director Martin Bamford’s opinion of absolute return funds has not changed in recent years. He says: “Though they do have a place, they are unnecessary for any investor looking to invest over the long term. We have seen problems in the market as indicated by what has happened with structured products, so absolute return funds do still have questions hanging over their heads. We do not recommend any at this time.”

Bestinvest senior investment adviser Adrian Lowcock says that he expects the market to continue to succeed, regardless of whether the rally continues or not.

He says: “The two premises behind Ucits III have been enhanced income and making use of long/short strategies. The difficult market conditions have seen people look to make less aggressive calls and, naturally, these absolute return funds have grown in popularity. They also have the ability to make use of the powers if the market turn although not to the same extent as hedge funds. The next step I would expect to see is a growth of fund launches targeting absolute returns outside of the UK.”

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