Thames River co-head of multi-manager Gary Potter has warned investors that now could be a dangerous time to invest in the absolute return sector.
Potter says a combination of uncertain markets and the fact that the absolute return sector is still in its infancy means that investors driven towards this area due to the current market turmoil could be making a mistake.
He says: “There is a danger going into that sector in this environment. You have to look at the risk that has been taken off the table.
“There is also a cooling on expectations for growth globally and many have been caught out. I also think the average investor does not understand what absolute returns do Many have lost money in the past 12 months.”
Potter says there are a number of good absolute return fund managers in the market but warns that there are equally as many who are learning their skills. He also expects at least a third of funds in the sector to close or be moved in the next few years.
He says: “In 2007, there were 700 Lipper global absolute return funds and by the end of 2010, only 400 of those were still around. There will be turnover. The sector is in its formative stages and it will take another five years to form properly.”
Recent research by FE Analytics shows only 43 per cent of the 69 funds in the absolute return sector in the UK have beaten inflation to deliver positive returns in real terms over one year.
Henderson absolute return multi-manager Tony Lanning says: “Some of the criticism of the absolute return sector is perfectly valid and there will be changes in terms of fund remits and sector. But there are experienced fund managers in that market who will do a good job. I am not sure it is any more dangerous now compared with a month ago.”
Potter says the Thames River team has some absolute return exposure in its cautious fund courtesy of the Odey UK absolute return fund, Henderson UK absolute return fund and the Legg Mason Western Asset global credit absolute return fund.