Absolute return funds can be as volatile as equities – is this confusing?
"There’s certainly a lot of diversity within the sector. Some funds follow a very low-risk approach, some follow a very high-risk approach. Volatility of course is just one way of expressing risk. There are lots of other types of risk in absolute return funds."
"I think it’s just more and more important investors should try to understand what funds they are investing in before they choose a fund within the sector."
Do some funds take on too little risk to deliver meaningful returns?
"In linking volatility with return and to risk, it’s always more than just a two-dimensional exercise. Volatility in itself doesn’t mean that much, return in itself doesn’t mean that much. We need to look at the risk-adjusted returns and then also appreciate that volatility is by no means the only measure of risk."
"We’ve seen funds in the past where they’ve displayed 3 to 4 per cent volatility for a 10-year period and suddenly they lose 20 per cent in one day. So it all depends on what happens inside the fund and specifically linking your risk characteristics with your return characteristics."
What should every absolute return fund have?
"For me, it’s not to lose money and to be consistent in returns. So a good risk-adjusted return and not to lose money."
Does Absolute Insight have it?
Past performance is not a guide to future performance.
"I like to think so. We’ve been running the strategy for nine years, in fact literally – to the week in May 2014, it will be nine years running the strategy. In that period, we’ve had one negative calendar year and that was 2008 when we were down 0.2 per cent, net of fees."
"In terms of volatility over that same nine-year period, we’ve been delivering returns of 5 per cent per annum but with very low volatility of 2.2 per cent, so again on a risk-adjusted basis that becomes quite attractive for low-risk investors."
How do you achieve consistent, low-risk returns?
A positive return is not guaranteed and a capital loss may occur.
"For one, we ensure there’s a very high level of diversification embedded into the fund so that no single position has a disproportionate amount of risk. And the way we do that is we invest across six discreetly different absolute return strategies. Each of these strategies has an absolute return objective, trying to deliver positive returns. Each of them has a mandate of ‘please try not to lose money on a 12-month basis’. So effectively by combining them into one fund investing across all these six different strategies, we’re getting a lot of diversification in terms of the investment universe they invest in, the fact that they are managed by different teams at Insight and also the fact that they all use very different investment approaches to achieve their absolute return."
Is Absolute Insight a standalone fund or part of a diversified portfolio?
"We actually do have a couple of clients who use this as a standalone. Certainly in terms of, in general, the fund’s returns are so lowly correlated to other key asset classes and even lowly correlated to a lot of the peer group within the Absolute Return sector; that says that it fits very well in a bigger portfolio. It should reduce the overall risk in a portfolio because of the low correlation. For people who are looking to come into absolute return, given that one fund actually gives you access to six absolute return strategies, it does mean if you are going to buy only one low-risk absolute return fund, this might be a good starting point given all the diversification that’s built into it."
This article is sponsored by BNY Mellon Investment Management. For a guide to absolute return investing, click here.
Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.
