Try pick ’n’ mix absolute funds

Despite the absolute return sector’s lacklustre performance, multi-managers assert that these funds have a place in a diversified portfolio – as long as they are chosen selectively

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Previously lauded as the panacea for investors looking for positive returns through all market conditions, absolute return has far from lived up to the hype which accompanied the sector’s launch in April 2008.

The fund category recently had an IMA makeover after the trade body re-named it the Targeted Absolute Return sector, primarily in a bid to send the message home to retail investors that absolute return portfolios, do not and never did contain any capital protection guarantees.

Designed as all-weather portfolios, the reality is that many have failed to impress during the volatility of recent years. From the end of May 2008, to 17 June, the sector has achieved an average total return of 2.62 per cent, putting it amongst the IMA’s poorest performing categories for the period.

The highest achiever was North American Smaller Companies, with an 11.48 per cent average. Over three years, the Absolute Return sector is also among the worst performers delivering a mean return of 2.51 per cent.

But multi-managers, despite the sector’s lacklustre performance, still assert that absolute return funds do have a place in a diversified portfolio. However as always the key is getting the right fund or funds, in the right mix.

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Peter Fitzgerald, co-head of multi-manager at Aviva Investors, says: “We believe an allocation to absolute return strategies is desirable within a diversified portfolio. However we believe that the majority of absolute return funds offer poor value and outcomes to clients, and one needs to be extremely selective in this area.”

Despite all of this, there has been a boost in confidence towards the fund category. Among the IMA’s bestselling sectors, according to its latest data for April, Absolute Return UK was the third most popular with net retail sales of £218m, well above its monthly average over the last 12 months of £86m.

One fund Fitzgerald highlights, and which is held in both the Aviva Investors Multi-Manager 40-60 per cent Mixed Investment and 40-85 per cent Mixed Investment Funds is the Marshall Wace TOPS strategy.  

“We believe this fund, unlike many others, has the ability to deliver absolute returns on a reasonably consistent basis without taking undue risk,” he says.

At the margin Mark Wright, manager of the multi-asset CF Miton Diversified Growth fund, says he has taken a “little” money out of absolute return.

“Absolute return in theory should be delivering uncorrelated returns and it should not matter where equity markets are going. Over the years there have been strategies out there which have claimed to be absolute return but actually do not add value, they are too correlated to equity markets, in many respects they are closet long only funds, with a little less beta,” he says.

Wright adds his fund has an allocation of about 4 per cent to absolute return, split evenly across four single hedge fund strategies. “Each of the strategies in the fund is truly uncorrelated to equity markets,” he says.

James de Bunsen, manager of the Henderson Multi-Manager Absolute Return fund, which invests in not just absolute return strategies but also in a mixture of lower beta and long only strategies too, says: “Absolute return is a volatility dampener, something you can buy and hold. Investors can at times have a slightly unrealistic view of absolute return, in that a lot of performance is still delivered by being long risk assets. It is diversification you pay for, and it can be more expensive.”

He recently invested in the Ignis Absolute Return Government Bond fund. The Ignis portfolio, which launched in March 2011, seems to have enjoyed a steady rise in assets and recently hit the €1 billion mark in assets under management. The fund aims to generate returns by taking long and short positions in the most liquid government bond markets as well as currencies and has exhibited a lack of correlation with risk assets such as equity and corporate bonds.

For his part, multi-manager senior analyst at Standard Life Investments, Jason Day, says absolute return has become more prevalent for them, as they reduced their fixed income exposure in the fourth quarter.

He says: “Government bonds were looking highly asymmetric as we felt they had very little potential capital upside given valuations and a great deal of downside. We use a combination of absolute return vehicles and have always had the asset class in the portfolios. A solid absolute return vehicle can add a lot of value and help keep volatility under control whilst projecting a steady trajectory of returns.”