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The Targeted Absolute Return funds worth the volatility

19 May 2014

Usually considered a defensive diversification, some funds in the IMA Targeted Absolute Return sector have been taking on more risk and getting rewarded for it.

By Daniel Lanyon,

Reporter, FE Trustnet

Investors should opt for less defensive Targeted Absolute Returns funds that are prepared to take on more risk, according Kerry Nelson managing director of Nexus IFA.

Absolute return funds shot to popularity in the aftermath of the 2008 financial crisis with their stated aim to make a return whether markets are rising or falling appealing to investors concerned about market corrections.

However, Nelson says many funds in the sector are too defensive to be much use to investors, giving them less freedom to generate attractive returns.

“There is definitely a place for a good absolute return fund within a portfolio but they are not really a panacea to great returns unless they take on more risk as markets slow,” she said.

“There was a plethora of launches of the type of fund emphasizing a defensive play in the wake of the financial crisis in 2008, but in longer term there are not the ones you want to be in.”

“They would give something a bit more substantial than cash but are not going to outperform within the sector.”

“When markets were jittery and people did not know where to put their money, it was a difficult period of time, but we are away from that now and so investors should be taking on a bit more risk.”

“Whilst we are in positive territory it is still quite difficult there are not those big leaps so now is when you want funds to be more nimble and take more risk.”

“We are not looking at a flat market but we are not going to getting any big upside either.”

The best performing funds in the IMA Targeted Absolute Return sector over the past five years have been those that have taken on more risk, according to FE Analytics.

With generally rising market conditions over the past five years, the funds in the IMA Targeted Absolute Return sector that have tended to show outperformance are those that have taken on greater risk, as shown in the graph below.

It shows the relationship between risk and return in the sector over five years.

Over this period there is a clear trend for greater performance in funds that had higher rates of annualised volatility.

All funds but one that outperformed the sector average over five years all took on higher risk than the average fund in sector, FE Analytics data shows.

Risk/Return of Targeted Absolute Returns funds over 5yrs


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Source: FE Analytics

This relationship is shown more acutely in the same chart over three years further suggesting outperformance has depended on making riskier plays as markets continued to rise.


Risk/Return of Targeted Absolute Returns funds over 3yrs


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Source: FE Analytics

One of the most consistent performers over this period has been the £93m City Financial UK Equity fund managed by David Crawford.

It was the best performer in the sector over one, three and five years. Over three years it has returned 76.54 per cent compared to a sector average of just 8.21 per cent.

Performance of fund and sector over 3yrs


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Source: FE Analytics

Despite its notable record the fund lost money in 2010 and was the worst performing fund in the sector.

Another top performer was the CF Odey Absolute Return, co- managed by James Hanbury and Jamie Grimston.

Over three years it has returned 72.38 per cent compared to a sector average of just 8.21 per cent but it has had a slow start to 2014 having struggled to add value, so far making a loss of 2.26 per cent.


Performance of fund and sector over 3yrs

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Source: FE Analytics

Another top performer in the sector over one, three and five years was £63m Argonaut Absolute return fund managed by FE Manager Barry Norris, which invests primarily in European equities.

Over three years it has returned 54.6 per cent compared to a sector average of 8.21 per cent.

Performance of fund and sector over 3yrs

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Source: FE Analytics

Other top performing funds in the sector taking on greater risk include Henderson European Absolute Return, Old Mutual Global Equity Absolute Return and Schroder Absolute UK Dynamic.

Chris Spear, managing director of Spear Financial notes that absolute return funds can be misleading as they have no general definition of the period in which they aim to deliver an absolute return in, with someone offering monthly targets and others annually or longer.

He also says some of the most popular funds have grown so large, they may find it increasingly difficult to generate returns without taking on greater risk.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.