There has been a huge increase in the popularity of Absolute Return funds in the UK retail space in recent years.
These funds typically aim to achieve positive returns over a rolling time period of no more than three years. There are 93 funds sitting within the Investment Association Targeted Absolute Return sector, 23 of which have been launched in the past three years as investors search for positive gains in the volatile markets of recent years.
However, are Absolute Return funds always the best choice to bring stable returns to your portfolio? We have seen extreme volatility in both the UK and global markets. The FTSE 100 index saw record highs in April 2015 of 7,103.98 yet had hit lows of 5,536.97 by February 2016 as it continued to be affected by woeful global news. During this time the average performance for the IA Targeted Absolute Return sector was -0.44 per cent, suggesting these strategies cannot weather all market conditions.
While it should be noted the managers are aiming for positive returns over three-year rolling periods, even with that in mind, 10 out of 72 funds have returned negative results over the past three years. The worst of these achieved a dismal -14.6 per cent. Equally, there are some outliers within the sector producing far higher gains than many other funds. For example, the City Financial Absolute Equity fund delivered 78.51 per cent.
This extreme range in performance can make it very difficult for advisers to know how to compare the funds within the sector, a view supported by the Investment Association’s review of the Targeted Absolute Return sector undertaken in 2013. Ultimately, all Absolute Return fund managers must rely on their experience, research and intuition to make the best decision for their investors. The hedging position they take, the sector allocation they use and the stock selection they make are all important factors to consider, but the client is still exposed to human judgement, and on occasion this can expose the client to human error. After all, absolute return fund managers are not infallible.
However, at a time when investors are keen to preserve capital but dissatisfied with returns offered by high-street banks, what other choices are there?
One option may be structured products. A wide range of these products are available, offering defined upside and downside protection.
Structured products with more defensive strategies have seen an uplift in popularity in recent months due to continued volatility in the markets, plus muted returns being generated by portfolios of funds. With returns of around 6 per cent to 9 per cent per annum, defensive structured products can achieve this when the FTSE 100 is down by 10 per cent or even 20 per cent.
As demonstrated in the table, looking at 10 kickout plans maturing in 2015 across these 10 products, which were the best performers last year, there was an average annualised return of 8.9 per cent generated.
Over the same period, the IA Targeted Return sector achieved an average annualised return of 4.1 per cent. Surely this is something to consider for anyone’s portfolio if they are looking to achieve targeted returns?
Leigh Fisher is business development manager at Investec Structured Products