Following concerns about the outlook for traditional asset classes given high valuations, growing macroeconomic headwinds and the prospect of higher interest rates, swathes of industry experts have warned that investors can no longer rely on the classic portfolio asset allocation of bonds and equities to protect their savings.
As a result, multi-asset portfolios that aim to deliver an uncorrelated ‘absolute return’ over a given period of time have become increasingly popular.
Our data shows professional investors have been increasing their exposure to absolute return funds over the years and, given its fame and size, it may come as little surprise that the £23.2bn Standard Life GARS fund has proven to the most popular with experts.
Source: FE Analytics
According to FE Analytics, 39 funds count Standard Life GARS as a top 10 holding and they include Marlborough Defensive, T Bailey Defensive, TB Wise Strategic and four funds from IFSL Tilney Bestinvest range. That figure includes 25 portfolios from Bambos Hambi’s Standard Life MyFolio range and the Your Portfolio line he manages for RBS.
Standard Life GARS was launched in May 2008 and uses multiple strategies within global equity, fixed income and currency markets to try and deliver on its aim of targeting a level of return equivalent to cash plus five percent a year, gross of fees, over rolling three-year periods.
According to FE Analytics, the fund – which is headed up by the group’s multi-asset investing team – has returned 53.24 per cent since its launch. It has outperformed the FTSE All Share over that time and has been three times less volatile.
On top of that, its maximum drawdown – which measures the most an investor would have lost if they bought and sold at the worst possible times – has been 12.58 per cent, compared to the FTSE All Share’s maximum drawdown of more than 40 per cent.
Performance of fund versus indices since May 2008
Source: FE Analytics
Standard Life GARS, unlike 81 per cent of funds within the IA Targeted Absolute Return sector, has delivered a positive return in every calendar year since its launch.
The fund has come increasingly under the spotlight recently given its huge size and as a number of its team recently left Standard Life to set up the Invesco Perpetual Global Targeted Returns fund. However, our study shows no managers count the Invesco Perpetual offering as a top 10 holding.
The second most popular absolute return fund with multi-managers is the $2.8bn Old Mutual Global Equity Absolute Return fund, which is a top 10 holding in 18 funds.
Those which hold Ian Heslop, Amadeo Alentorn and Mike Servent’s fund as a top 10 holding include Aberdeen Multi Manager Diversified Alpha Portfolio, FP Apollo Multi Asset Cautious and IFSL Brooks Macdonald Cautious Growth.
The fund aims to deliver a positive return over rolling 12-month periods by taking long and short positions within global equity markets. It also aims for those returns to be lowly correlated to both equities and bonds.
Since launch, Old Mutual Global Equity Absolute Return has gained 42.78 per cent and while that is half the rise of the MSCI AC World index over that time, the fund has been three times less volatile and has had a maximum drawdown three times less than that of global equities.
It has been very lowly correlated to global equities over that time as well as its correlation to the index has been just 0.02.
IBOSS’s Chris Metcalfe described Old Mutual Global Equity Absolute Return as a holding which would suit a cautious, balanced and aggressive investor.
“We are not holding this fund looking for negative correlation with equities, but it is there to give a degree of downside protection versus a completely long-only global equity position. We feel, therefore, that it is suitable as a constituent in all the different risk rating portfolios,” Metcalfe said.
Next on the list is Morgan Stanley Diversified Alpha Plus which, although it sits in the offshore universe, has proven to be very popular with some of the best known fund of funds managers.
Some 14 funds count it as a top 10 holding and they include two portfolio from the Aberdeen Multi Manager range, FE Alpha Manager Bill McQuaker’s Henderson MultiManager Absolute Return fund and four portfolios from Marcus Brookes and Robin McDonald’s Schroder MM range.
The €7bn Morgan Stanley Diversified Alpha Plus fund is five-crown rated and has been managed by Cyril Moulle-Berteaux and Sergei Parmenov since July 2011.
Though it was only launched in January 2011, the £1.3bn BNY Mellon Absolute Return Equity fund – which is headed up by Insight and uses pair trades to generate a lowly correlated return – is a popular holding as it crops up in 12 funds’ lists of top 10 holdings.
They include FE Alpha Manager Sonja Uys’ Insight Absolute Insight fund and Premier Multi-Asset Absolute Return.
Our data shows the fund has returned 14.58 per cent since its launch, which compares to a 38.57 per cent gain from the FTSE All Share. However, as the graph below shows, the fund has had very little volatility over that time and its maximum drawdown has been just 2 per cent.
Performance of fund vs index since January 2011
Source: FE Analytics
The other two funds to feature on the list are CF Odey Absolute Return – which is a more aggressive offering than any of the others featured in this article as it tends to offer equity-like returns but with a higher chance of capital loss – and the now closed Majedie Tortoise fund. Both funds are held as top 10 holdings in 11 funds of funds.
Like the Odey fund, Majedie Tortoise is a long/short equity fund and its manager, Matthew Smith, has a proven ability of participating in rising markets while protecting investors in falling ones.
It has made a positive return in every calendar year since its launch in August 2007 – the exception being in 2010 when it lost 0.24 per cent. The fund returned 6.94 per cent in the crash year of 2008, when global equities posted double-digit losses, but rebounded with markets in 2009 when it delivered a 33 per cent gain.
Performance of fund versus index since Aug 2007
Source: FE Analytics
That means, Majedie Tortoise has returned 129.46 per cent since launch while the FTSE All Share is up just 46.13 per cent.
As mentioned before, it is now closed but if investors want to gain access to the strategy the likes of Rob Burnett and Gary Potter’s F&C MM Navigator Moderate, Henderson MultiManager Absolute Return and the £1.6bn Schroder MM Diversity fund all have meaningful positions in Majedie Tortoise.
