Markets have traded in a somewhat sideways fashion over 2014 to date as geo-political tension in Ukraine and the Middle East, the likelihood of higher interest rates in the US and the UK, and concerns over valuations in developed market equities have all hampered further upward progress.
FE Analytics shows the FTSE All Share has gained just 0.60 per cent since the start of the year and the Euro Stoxx 50 made 0.28 per cent while the Nikkei 225 has shed 3.10 per cent.
Things have been somewhat better in the US with the S&P 500 rising 10.18 per cent.
Performance of indices YTD
Source: FE Analytics
What’s more, active UK equity managers have found it difficult to match even this lacklustre gain in the market - the average fund in the IMA UK All Companies sector lost 0.99 per cent in 2014’s first nine months.
The average IMA Targeted Absolute Return fund, on the other hand, has managed to beat UK equity managers and the All Share with a gain of 1.95 per cent.
Given their aim to produce consistent positive return, absolute return funds are held by investors in the hope of delivering performance in flat or down markets.
According to FE Analytics, David Crawford’s £86.7m City Financial Absolute Equity fund is the sector’s best performer year to date with a rise of 18.32 per cent.
The four FE Crown-rated fund is a fundamental equity long/short strategy that aims to achieve a positive absolute return over rolling 12-month periods.
Performance of fund vs sector and index YTD
Source: FE Analytics
Since launch in March 2008 the fund has returned 177.67 per cent compared with 21.62 per cent for the average absolute return portfolio and 55.41 per cent for the All Share.
It has an annualised return of close to 17 per cent over this time; the All Share’s is just 7 per cent.
It must be noted, however, that this fund is much more volatile than the average sector, which may prove off-putting for some absolute return investors.
Over the past five years its annualised volatility stands at 11.42, compared to 2.17 per cent for its average peer.
Furthermore, its maximum drawdown, which shows the outcome of an investor who bought at the fund’s peak then sold at its trough, is an eye-watering 25.57 per cent - much greater than the sector’s 2.81 per cent and even higher than the All Share’s 15.94 per cent.
City Financial Absolute Equity has a clean ongoing charges figure (OCF) of 0.94 per cent.
It has a correlation of just 0.16 to the All Share over the past five years.
Other highly rated absolute return vehicles to have significantly outperformed the FTSE All Share include FE Alpha Manager John Bennett's £62.6m Henderson European Absolute Return fund, which rose 5.54 per cent over 2014’s first nine months.
Performance of fund vs sector and index YTD
Source: FE Analytics
The five FE Crown-rated fund aims for a positive long-term return by investing in European including UK equities.
According to the latest fact sheet, the fund has a net long position to the UK of 20.6 per cent - its largest geographical weighting.
Since Bennett took over the fund in January 2011, it has returned 37.59 per cent. Over the same time, the average IMA Targeted Absolute Return fund has made just 10.62 per cent, while the All Share has risen 31.76 per cent and the MSCI Europe 25.70 per cent.
Over three years, the fund’s annualised volatility of 4.42 per cent is higher than the peer group’s 1.81 per cent but much lower than both the All Share’s and the MSCI Europe’s.
Likewise, its maximum drawdown of 2.92 per cent is about a percentage point higher than its peers’ but well below the 10.97 per cent in UK equities and the 14.98 per cent in European stocks.
Henderson European Absolute Return, which has a three-year correlation of 0.52 to the FTSE All Share, has clean ongoing charges of 0.99 per cent.
Old Mutual Global Equity Absolute Return, which has been managed by Ian Heslop, Mike Servent and Amadeo Alentorn since launch in June 2009, has beaten the All Share’s 0.60 per cent rise by advancing 4.62 per cent over the year to date.
Performance of fund vs sector and index YTD
Source: FE Analytics
The five FE Crown-rated fund has a correlation of just 0.03 to UK equities over five years, according to FE Analytics, in keeping with its stated aim of having a low correlation with equity and bond markets.
In contrast, the average member of the IMA Targeted Absolute Return sector has a 0.80 correlation to the All Share.
Since launch the fund has returned 38.91 per cent, beating the peer group’s 22.38 per cent average in the process.
However, this is far less than the FTSE All Share’s 94.76 per cent return over the same period.
Old Mutual Global Equity Absolute Return has a clean OCF of 0.98 per cent.
Other four or five crown-rated absolute return funds returning more than four times the All Share over 2014 include Standard Life Investments Global Absolute Return Strategies, Threadneedle UK Absolute Alpha, Insight Absolute Insight Emerging Market Debt and FP Argonaut Absolute Return, FE Analytics shows.
