The IMA Targeted Absolute Return sector is a real mixed bag of funds with managers adhering to different absolute return objectives.
While some investors are happy to stomach a higher level of volatility in search of a greater return, others are far more risk-averse because they have a shorter investment timeframe.
Those types of investor will want a fund that can give them a consistent, although possibly lower, total return as they are looking for a manager who will offer as few sleepless nights as possible.
In our most recent study, we searched for funds which have done exactly that over recent years and it is the relatively unknown Carmignac Portfolio Capital Plus fund that has come out on top.
Funds with the highest number of positive months over 3yrs
Source: FE Analytics
The fund, which is managed by Carlos Galvis, has only posted a negative return in two of the last 36 months.
The two months it lost money were November 2011, when it lost 0.52 per cent, and in June 2013 – which has been dubbed the “taper tantrum” as most asset classes corrected when the Fed announced its plans to reduce quantitative easing.
It lost a more substantial 0.92 per cent that month.
Source: FE Analytics
Nevertheless, Galvis’ ability to protect capital is clear as the fund has had the third lowest annualised volatility – 1.69 per cent – and sixth lowest maximum drawdown – 2.14 per cent – in the 58-strong sector over three years.
Maximum drawdown measures how much an investor would lose if they bought and sold at the worst possible time.
The Luxembourg-domiciled SICAV is an absolute return bond fund. Galvis invests across developed corporate and sovereign debt markets as well as emerging market debt.
He also invests in various currencies and will take long/short positions in order to deliver a smooth positive return.
However, the manager’s wish to protect capital means Carmignac Portfolio Capital Plus has only returned 12.51 per cent over three years.
One fund which has managed to combine consistency with higher returns, however, is the five-crown rated Henderson European Absolute Return fund.
According to FE Analytics, it has delivered a positive return in all but six of the last 36 months.
Its biggest monthly fall was in May 2012 when it lost more than 2 per cent, while its other five monthly losses were all less than 0.6 per cent.
The £60m fund, which is headed up by Leopold Arminjon and FE Alpha Manager John Bennett, has delivered an impressive total return of 41.93 per cent.
As a point of comparison, the MSCI Europe ex UK index has returned 38.40 per cent over that time.
Performance of fund versus index over 3yrs
Source: FE Analytics
The only fund on the list to have generated a higher return over a cumulative three-year period is FE Alpha Manager Barry Norris’ FP Argonaut Absolute Return fund, which is up 47.13 per cent.
But this fund, which also invests in Europe, has made a positive return in 28 out of the last 36 months, has a higher maximum drawdown and higher annualised volatility than Bennett and Arminjon’s fund over three years.
Henderson European Absolute Return is a long/short equity fund.
The managers currently have 63 long-positions and 23 short positions and will also use index futures to protect their investors.
The other fund to have delivered a positive return in 30 of the last 36 months is Barrie Whitman, Alasdair Ross and Michael Poole’s £805m Threadneedle Credit Opportunities fund which, as its name suggests, predominantly invests in fixed income assets.
Two other lesser-known funds which are worthy of a mention are Premier’s Defensive Growth and Liberation Absolute Return Growth funds.
The former has only lost money in seven of the last 36 months, while the latter has lost money in eight.
One of the FE Research team’s favoured absolute return funds, Insight’s Absolute Insight, has also made it onto the list as our data shows it has made money in all but nine months over the last three years. Its largest ever monthly fall was in September 2011 when it lost 1 per cent.
The five crown-rated, £707m fund is run by Sonja Uys and FE Alpha Manager Reza Vishkai and is a member of FE Select 100.
Performance of fund versus index over 3yrs
Source: FE Analytics
Though the fund has only returned 9.81 per cent over three years, Amandine Thierree, analyst at FE, says it is a perfect holding for investors who want capital protection.
“The risk/return profile of the fund may look boring, but this is exactly what its managers are aiming for: to provide small but regular returns, minimise volatility and preserve investors’ capital,” Thierree said.
“Derivatives are used heavily within the underlying funds and Insight regards this as a quicker and cheaper method of implementing its views.”
The portfolio is a fettered fund of fund as Uys and Vishkai blend five of Insight’s portfolios to try and achieve their objective.
One of those portfolios is the Absolute Insight Credit fund, which makes up 20 per cent of the portfolio and also features on the list of consistent funds due to its positive returns in 28 of the last 36 months.
The ever-popular Standard Life Global Absolute Return Strategies, or GARS, fund features on the list as well.
Like the Insight fund, it has lost money in just nine of the last 36 months though its monthly falls have tended to be greater.
The main reason could be that the managers of the £21bn GARS fund have an absolute return horizon of three years, compared to the Insight fund’s horizon of just one year.
Though Standard Life GARS, which is also a member of the FE Select 100, has had a greater maximum drawdown and annualised volatility than Insight Absolute Insight over three years, the former has generated a total return which is twice as great as Uys and Vishkai’s fund over that time.
