While 2014 is only half way through, it’s always a good idea to keep check of how your absolute return fund is doing – particularly in a year as turbulent as this.
The fast rising markets of 2012 and 2013 made it relatively easy for absolute return funds to make money, with more than 90 per cent making money over the two calendar years. 2014 has been a different story however, with a number of funds on track to deliver negative returns.
In total 24 of the 70 funds – 34 per cent – in the IMA Targeted Absolute Return sector have lost money so far in 2014. Talk of interest rate rises and steep sell-offs in Japan, China, tech and UK small and mid-caps have made life difficult for absolute return managers.
The strong performance of bonds, which are shorted in a number of portfolios, have also caught some managers off guard.
Among the most notable of this year’s laggards are the four-crown rated CF Odey Absolute Return fund, the £1.2bn Insight Absolute Insight Equity Market Neutral fund and the £3.4bn Ignis Absolute Return Government Bond fund – all very popular with investors and advisers.
Both the Insight and Ignis funds are down less than 1 per cent since the year began, so they aren’t the worst offenders in the sector, but the Odey portfolio has shed nearly 5 per cent, making it the fourth worst-performing fund in IMA Targeted Absolute Return year-to-date.
The 10 worst-performing absolute return funds in 2014
Source: FE Analytics
The Odey fund has been the standout performer in the sector in recent years, returning more than 100 per cent in the three years to 1 January 2014, compared to just 8.5 per cent from the sector average.
James Hanbury’s £938m portfolio has been almost as volatile as the FTSE All Share over the period however, and its tendency to fall during market sell-offs has seen it lose money this year.
FE analyst Charles Younes warned against buying into risky top-performing absolute return funds in an interview back in March – just before the Odey fund took a dive.
Performance of funds, sector and index in 2014
Source: FE Analytics
It should be noted that the fund has a very low correlation to the equity market this year.
The fund that has suffered the most in the first half is the £64.8m CF Eclectica Absolute Macro portfolio, run by Hugh Hendry.
The fund aims to achieve positive returns by investing across a range of asset classes, primarily bonds, equities and cash, but has had a difficult time over the last 12 months, shedding 7.95 per cent and is only up 3.41 per cent since launch in December 2009.
The IMA Targeted Absolute Return sector has gained 14 per cent over that period.
Hendry admitted late last year that he was upping his risk exposure even though he remained unconvinced by the global recovery.
A long position in Japan in the early months of the year was particularly damaging.
Another fund which has suffered losses since the start of the year is Schroder Absolute UK Dynamic, run by FE Alpha Manager duo John Warren and Paul Marriage.
Owing largely to Marriage’s small cap expertise on Schroder UK Dynamic Smaller Companies, the absolute return fund has a small-cap bias.
Since small and mid-caps experienced a sell-off in February, the portfolio has fallen with them, losing more than 5 per cent in 2014 overall.
Year-to-date performance of fund vs indices
Source: FE Analytics
However, the fund has a solid track record of delivering positive returns year-in and year-out, managing it every calendar year since its launch in 2009.
FE Alpha Manager Steve Cordell and Julie Dean’s Schroder UK Absolute Target fund has also lost money this year [-4.71 per cent].
A number of the funds that have performed worst this year are long/short absolute return funds, including those run by Hanbury and Marriage.
Long/short specialist David Crawford, who runs the £78m City Financial Absolute Equity fund, has been much more successful however, topping the sector this year with returns of almost 12 per cent.
It’s been the second most volatile over the period however, and has one of the highest max drawdowns.
Performance of funds in 2014
Source: FE Analytics
Other success stories include Insight Absolute Insight, which true to form has continued to eke out a positive return with very low volatility, as well as Invesco Perpetual Global Targeted Returns and Henderson European Absolute Return.
Newton Real Return, managed by FE Alpha Manager Iain Stewart, has also had a good year, returning 2.43 per cent so far.
John Blowers, head of trading platform Trustnet Direct, says that the steep losses made by some managers this year shows that investors need to be very careful when choosing their absolute return fund.
“You don’t buy an absolute return fund to return 30 or 40 per cent in a rising year – you buy it for a year like 2008 or even one like 2014, which has been more uncertain to what we’ve been used to of late,” he said.
“There’s nothing wrong with buying something like CF Odey Absolute Return which is a very good fund, but its risk profile means that it is susceptible to losing money during certain periods.”
“If you’re buying an absolute return fund to protect your capital and have a relatively short time horizon, you need to do your homework and not just buy the one performing best – especially if the time period in question is made up mostly of rising markets.”
Blowers points to Insight Absolute Insight – a constituent of the FE Select 100 – as a good option for particularly cautious investors.
