Its popularity has been justified by strong performance over both three and five year measures; however, three funds in the IMA Targeted Absolute Return sector have returned more whilst also recording lower levels of annualised volatility.
Some funds, such as the £891m CF Odey Absolute Return fund, have made significantly greater returns albeit with a much higher level of risk.
The CF Odey Absolute Return fund has made a staggering 169.42 per cent over five years compared to an average return in its sector of 20.8 per cent.
Others such as the £1.2bn Insight Absolute Insight Equity Market Neutral fund have been much better at protecting against the downside, but not managed to keep up with their Rival.
Three funds, however, have given investors the best of both worlds.
The graph below shows the relationship between risk and return in the IMA Targeted Absolute Return sector over three years. Henderson European Absolute Return and Blackrock European Absolute Alpha have outperformed Standard Life GARS with lower levels of volatility.
Risk/return of Targeted Absolute Returns funds over 3yrs
Source: FE Analytics
Newton Global Dynamic Bond has fallen slightly short, but has achieved the feat over a five year period. The Henderson fund has also beaten GARS with less volatility, but BlackRock European Absolute Alpha doesn’t have a track record going back this far.
Risk/return of Targeted Absolute Returns funds over 5yrs
Source: FE Analytics
The £37.6m Henderson European Absolute Return fund, managed by FE Alpha Manager John Bennett has been a top quartile performer over one and three years.
According to FE Analytics, it has returned 45.65 per cent over five years, beating its sector average by almost 25 percentage points.
Performance of fund, sector and benchmark over 5yrs
Source: FE Analytics
The £74m BlackRock European Absolute Alpha fund is co-managed by Vincent Devlin and Stefan Gries.
According to FE Analytics, it has made a positive return in each calendar year since its launch in 2009. In 2011, it returned 5 per cent compared to a slight loss from the average absolute return fund, and a loss of more than 11 per cent from the average Europe ex UK fund.
Ben Willis, head of research at Whitechurch, recommends the fund for cautious investors. He says its market neutral strategy means that the manager strips out all market risk, meaning that it should hold up well during sell-offs.
The £925m Newton Global Dynamic Bond fund buys fixed interest of all types and uses derivatives to target an absolute return in all market conditions.
According to FE Analytics, the fund has made more than double the returns of the sector over five years. It has returned 50.84 per cent.
Performance of fund, sector and benchmark over 5yrs
Source: FE Analytics
Chris Spear, managing director of Spear Financial, says that the smaller size of these funds gives them an advantage over the £20bn GARS portfolio.
“I’m reticent to criticise it, because of its strong performance in recent years. However, it is bigger than it was and it is still growing,” he said.
“When you look to the future the fund is only going to get bigger. One or two years down the road it could be quite unwieldy if it continues to grow.”
“When bond funds start to look illiquid an absolute return fund is a good alternative to give you some upside. However, GARS is a really huge fund and looking almost like a quasi-bond fund at the moment. As much as they say they can cope with the size, I am reticent they can.”