Professional investors are increasingly using absolute return funds for downside protection, as an alternative to fixed income.
The surge in investor sentiment last year and the bull run on equities has done little to dampen enthusiasm for absolute return funds among multi-managers and advisers.
According to the Investment Management Association, the Targeted Absolute Return sector was the second most successful sector in terms of net retail sales for 2013. Throughout 2013, the sector saw net retail sales of £2.2bn, compared with £860m of net retail sales in 2012.
Apollo Multi Asset Management fund manager Ryan Hughes says he has increased exposure to absolute return funds because he sees this year as being one in which alpha will be a driver for returns.
F&C multi-manager co-heads Gary Potter and Rob Burdett have been steering their portfolio towards absolute return funds due to yield compression across assets, from narrowing debt spreads and increasing equity dividends.
Santander Asset Management multi-managers Toby Vaughn and Tom Caddick are also aiming to beef up their absolute return exposure. They already have a sizeable allocation to absolute return assets and are considering increasing this exposure further.
Vaughn says: “We are looking to make absolute return more focused on long/short equity strategies. We also want to limit exposure to any agressive fixed interest absolute return strategies.
“This is because the outlook for traditional defensive assets, such as sovereign bonds and cash, is much more questionable. We believe we could provide excess return through absolute return.”
Chelsea Financial Services managing director Darius McDermott reports a steady demand for absolute return funds. He says: “People are using absolute return funds to replace bond funds. We generally see a small but steady requirement for absolute return funds.
“The funds on our list are the £864m BNY Absolute Return Equity fund, BNY Absolute Return Equity fund, the £19.8bn Standard Life Investments Global Absolute Return Strategies fund, the £310m Henderson UK Absolute Return fund and the £8.6bn Newton Real Return fund.”
The Gars fund had a tumultuous 2013 following re-ratings and a series of departures, including that of founder and director of multi-asset and fixed income Euan Munro, who was hired by Aviva Investors in July. SLI plans to launch a more aggressive version of the fund for insitutional investors.
Advisers are also starting to move more money to absolute return funds, though there is only a handful they rate.
EA Financial Services managing director Minesh Patel says: “I do like absolute return funds but there are only three that are credible: Gars, the Newton Real Return fund and the £921m CF Odey Absolute Return fund. These are the only three that have controlled the downside and achieved some performance.
“Absolute return funds are renowned for using the ‘absolute’ term too loosely. You may as well go into a cautious return fund for returns.”
Lift Financial group technical director Joel Adams agrees that, while absolute return strategies are useful, there are few funds that actually deliver.
He says: “Absolute return funds are currently on our radar. We feel we need to find alternative ways of diversifying equity risk and see absolute return funds as a good option.
“But we feel there are only a few true ‘absolute’ return funds available and we are using most of the £1.1bn InsightInsight Equity Market Neutral fund. The fund will not ever provide equity-like returns but has an excellent track record of protecting against volatility and providing an ideal hedge against inflation for investors.”
Three Counties IFA Andrew Alexander says: “With fixed income the way it is now, you cannot use it as a volatility dampener, so it is best to use absolute return.
“I use the £152m Swip Absolute Return Bond fund, the £60m Alliance Trust Dynamic Bond fund and I also like the £2.5bn Ignis Absolute Return Government Bond. In an ideal world you would get both upside and downside protection. The absolute return sector is like a bag of cats, they are all different.”
Montfort International financial adviser Matthew Denne is in Gars but prefers other assets for downside protection. He says: “There is definitely merit to hold absolute return funds because, while we are sometimes as an industry obsessed with benchmark returns, we need to remember investors want to see returns.
“For downside protection we also like property and commodities. In times of economic upheaval, there is always a flight to safety. I would not say we are at the extreme end of things but there is a consensus view that markets have come a long way. I like them because they are hard assets and people like more tangible assets at a time of crisis.”
Equilibrium Asset Management investment manager Mike Deverell has also increased allocation to absolute return funds but has decided to go for the £170m Invesco Perpetual Global Targeted Return fund instead of Gars.
Deverell says: “We would always hold some absolute return funds because they provide diversified and it is quite sensible if you want exposure to equities but you are a bit concerned.
“I would agree some markets have got ahead of themselves – if you look at the US it is trading at quite a high valuation. So we reduced exposure to traditional equities and allocated it to alternative funds such as the Invesco GTR.
“We used to be in the SLI Gars fund but we were concerned it was getting too big and we met with the Invesco team which contained some of the founders of Gars, so that helped with our decision.”