Among the worst performers in the sector – recently renamed IMA Targeted Absolute Return – are the Stan Life Inv Global Absolute Return Strategies (GARS) and Newton Real Return, which are down 4.91 and 6.33 per cent since 23 May 2013, respectively.
These two are the largest funds in the sector by some distance, with combined assets under management (AUM) of more than £25bn.
Performance of funds vs sector over 1yr
Source: FE Analytics
While Absolute Return funds tend to target a positive return over either one- or three-year rolling periods, the news is likely to be concerning for investors who view these kinds of vehicles as an alternative to cash.
The worst-performing fund in the sector over the month-long period is the £19.4m CF Absolute Return Cautious portfolio, which has lost 8.54 per cent. This is only a fraction lower than the losses sustained by the FTSE All Share.
The other funds that lost in excess of 4 per cent over the period are Old Mutual Voyager Alternative Investments and Schroder ISF Asian Bond Absolute Return.
Top-5 worst-performing Absolute Return funds since 23 May 2013
| Name | Return (%) |
|---|---|
| FTSE All Share | -9.38 |
| CF Absolute Return Cautious Multi Asset | -8.54 |
| Schroder ISF Asian Bond Absolute Return | -7.17 |
| Newton Real Return | -5.83 |
| Stan Life Inv Global Absolute Return Strategies | -4.91 |
| Old Mutual Voyager Alternative Investments | -4.73 |
Source: FE Analytics
A spokesperson for Standard Life GARS pointed out that the last month has been a particularly difficult time because various markets that typically have a low correlation to each other have all taken a plunge in the same direction. This includes all of the major equity markets, the bond markets, gold and other commodities.
However, they pointed out that the fund attempts to deliver a positive return over a rolling three-year period, which it has successfully done since its launch back in 2008, and highlights the fact that it has fallen less than most asset classes over the last month.
"Markets have been particularly volatile in recent weeks, with most risk assets having fallen more than GARS from their short-term peak over the month of May – which means GARS is benefiting from a high level of diversification in adverse circumstances," the spokesperson said.
"The central investment objective of GARS is to achieve a cash plus 5 per cent return over a rolling three-year period and this aim necessitates taking some risk. We believe that our investors are well aware that the return objectives are only ever to be understood as applying to multi-year time periods."
"We are confident that GARS will continue to deliver its target return over a rolling three-year period," they added.
According to FE data, over the last three years, Standard Life GARS has returned 15 per cent, which is well in excess of the return of cash plus 5 per cent.
Performance of fund vs index over 3yrs
Source: FE Analytics
However, it is worth pointing out that the last three years have been very positive for equity markets, with the FTSE All Share up 34.19 per cent over the period.
Many Absolute Return funds, including GARS, have tended to have a positive correlation to the equity markets in recent years.
A recent FE Trustnet article pointed out that the GARS fund uses some market-neutral strategies to ensure it is protected against sudden market falls, but it aims to add value through pure long positions as well, to try to take advantage of upswings in the market.
As the spokesperson said, the fund attempts to beat cash plus 5 per cent, which means it has to take on some market risk from time to time.
Our data shows that the fund has a positive correlation of 0.57 to the FTSE All Share over a five-year period, which is still deemed to be low according to FE's analysts. However, other funds have a much higher correlation.
The Newton Real Return fund, for example, has a positive correlation of 0.71 to the All Share over a five-year period, while the IMA Targeted Absolute Return sector average has a positive correlation of 0.87.
To put this in to perspective, the average absolute return fund has a higher correlation to the All Share over a five-year period than the average fund in the IMA North American sector does.
Ben Willis (pictured), head of research at Whitechurch, says he is concerned by the steep falls in Standard Life GARS and Newton Real Return – both of which he holds.
"The kind of drawdowns we’ve seen over the last month are concerning. We’re fully aware of the falls as they aren’t what we anticipated – it’s hard to stomach," he said.
"I do think it highlights the problem with the sector itself, because there’s such a mismatch in there. To be fair to Newton, the Real Return fund is a multi-asset fund with at least 50 per cent in equities. It does use derivatives to try to hedge some risk out, but it is not surprising it has been affected. However, as I said, it has gone down more than we would have liked."
"GARS is a bit more surprising because it’s got such a diverse range of assets in there doing different things."
In spite of his disappointment, Willis says he will be keeping hold of both funds, but will be watching their progress closely.
"In the case of GARS, I think you’ve got to look at it as a bit of a blip," he said. "They’ll be looking at it as a 'perfect storm' scenario when their strategies just weren’t the right ones to be in."
"They’ve been so good on a risk-adjusted level since launch and have achieved its objective consistently. As disappointing as it is, I’ll be sticking with it."
Although Standard Life GARS has achieved its objectives consistently since launch, it is worth pointing out that the fund fell around 13.5 per cent during the Lehman crash of 2008.
Not all absolute return funds have suffered during the recent downturn, with some delivering a positive return over the period, with next to no volatility.
Among these is the Insight Absolute UK Equity Market Neutral fund, which attempts to eliminate all equity market risk through its market-neutral approach. Over a five-year period, the Insight Absolute UK Equity Market Neutral fund has next to no correlation to the FTSE All Share, at -0.02, according to FE data.
In April, FE Trustnet senior reporter Thomas McMahon identified it as a good choice to protect against a possible market correction.
Cazenove Absolute UK Dynamic and Ignis Absolute Return Government Bond – recently tipped by FE Alpha Manager David Coombs as funds that are neither correlated to the equity or bond markets – are among the others in the sector that have held up well over the period.
Performance of funds vs index since 23 May 2013
Source: FE Analytics
The Ignis fund, which was only launched in March 2011, has a correlation of just 0.17 to the FTSE All Share over a one-year period.
Willis rates the Insight fund highly and sees it as a much better alternative to cash than higher-beta plays such as GARS and Newton Real Return.
"Andy Cawker [and his team] invest purely in pair trades, looking for steady returns only marginally in excess of cash," he said. "It doesn’t surprise me that they’ve held up so well."
"What it does show is that you have to do your homework when looking at the [Targeted Absolute Return] sector. There are just so many different things in there."