Invesco Perpetual Global Targeted Returns has proven to be a popular option since its launch less than two years ago, but the absolute return fund has struggled since the start of 2015. Should investors be concerned by this?
The fund was launched in September 2013 after Invesco Perpetual hired David Millar, Dave Jubb and Richard Batty from Standard Life Investments. The trio were instrumental in building the track record of the behemoth Standard Life Investments Global Absolute Return Strategies fund – also known as GARS – before their move.
Since launch the fund has posted a 12.58 per cent total return, which is broadly in line with that made by GARS, which is seen as its main rival, comfortably above the average gain in the IA Targeted Absolute Return sector and much higher than the 0.98 per cent rise in its three-month sterling Libor benchmark.
Performance of funds vs sector and index since Sep 13
Source: FE Analytics
Between the fund’s launch and the end of 2014, annualised volatility stood at 3.66 per cent while its maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – was 0.93 per cent.
While these metrics are higher than those for its average peer, they compare well with the MSCI AC World’s 7.92 per cent annualised volatility and 3.25 per cent maximum drawdown. The fund targets volatility half that of global equities over rolling three-year periods.
Since the start of 2015, however, the fund’s performance has been less than spectacular, with a total return of just 0.52 per cent representing underperformance of both the sector average and its biggest rival. This includes two falls of 3.40 per cent and 4.03 per cent in the space of less than five months, albeit with a bounce-back in between.
Over this period, Invesco Perpetual Global Targeted Returns has posted a maximum drawdown of 2.58 per cent (compared with 0.03 per cent from its average peer) and annualised volatility of 3.09 per cent, against global equities’ 5.37 per cent.
Performance of funds vs sector and index over year to date
Source: FE Analytics
Of course, it must be remembered that the fund’s aim is to generate “a positive total return in all market conditions over a rolling three-year period”, so its performance since launch – and especially over just a few months – is a short time frame.
However, the fund’s early popularity means it deserves some scrutiny as its assets have already grown to just under £1.7bn – making it the fifth largest portfolio in the IA Targeted Absolute Return sector in less than 20 months. With assets of £25.4bn, GARS remains the peer group’s largest fund.
Ben Willis, head of research at Whitechurch, said: “I wouldn’t be panicking too much at the moment, as you’d expect these things, but I would if it drifts into a sustained period. After six months or more of poor performance you have to start questioning the managers and where they’re positioned.”
“You always have to be aware of what you’re invested in and what it’s trying to do. The bottom line is this types of funds do have periods where they are going to lose you money – there’s not going to be an absolute return every day of the year.”
Georgina Taylor, product director for Invesco Perpetual’s multi-asset team, concedes that the past few months have been “challenging” for the fund.
She argues that speculation over the likely timing of the Federal Reserve’s first interest rate hike and concerns over Greece’s negotiations with European Union has led to a “transition across markets” that has caused problems for most multi-asset funds.
“What has been important is to assess where there is a fundamental change in markets and where there is just a short-term setback for risk assets,” she said.
“Flexibility is very important for a multi-asset fund in this type of environment and having the flexibility to reduce directional exposure to an asset class and increasingly focus on relative value ideas is an important tool for multi-asset investing.”
An example of this flexible approach was seen in February, when the fund “significantly” reduced its exposure to fixed income by removing its US duration idea and replacing it with one based buying Australia government bonds versus eurozone government bonds.
This caused short-term pain but the managers expect the idea to work over the longer run.
Performance of indices over 3months
Source: FE Analytics
Meanwhile, GTR has exposure to European equities due to their belief that value remains on a two to three-year view. However, the “tug of war” between the improving fundamental drivers of European equities and the risk premium associated with the potential for a Greek exit created problems in this part of the market.
“When markets are very focused on only a couple of drivers then these relative value ideas are not always rewarded in the short term,” Taylor added. “What is important is that we constantly reassess where we believe there to be value on our two to three-year time horizon.”
The fund have also has exposure to volatility markets, through swaps that generate returns when volatility is higher. Despite the recent market falls, however, volatility has not ramped up as much as might be expected.
“Volatility should be a good diversifier for a multi-asset portfolio but in the recent market turmoil volatility has not really increased, perhaps surprisingly, and so has not helped cushion the portfolio from the falls we have seen across other asset types,” the product director explained.
“Taking a longer term view we do believe volatility will rise as markets transition from a policy dependent backdrop to pricing in a change in the economic landscape, in particular due to potential rate rises in the US and UK and economic growth risks in areas such as China.”
Richard Troue, head of investment analysis at Hargreaves Lansdown, said that a difficult few months of performance should not change an investor’s view of the fund, as challenging times can always be expected over the short term.
“With a fund like this – and GARS is pretty similar – there’s so many levers they can pull in order to generate returns and offer diversification from stock and bond markets. Most of the time they’ve done OK at that and their records are pretty good, but every now and again the stars won’t all be aligned and they will go through a slightly rocky period,” he said.
“GTR is a bit more correlated to bonds and has performed less well as result, being roughly flat over the year to date. I wouldn’t let that cloud my long-term view and I still think that funds like GTR and GARS should offer good absolute returns with lower volatility than stock and bond markets over the long term.”
Willis holds Invesco Perpetual Global Targeted Returns in his portfolios but alongside GARS. FE Trustnet recently examined the argument for holding the two funds together, given that GARS tends to have a higher correlation to equities while GTR has been more correlated with bonds.
Commenting on GTR’s recent run, Willis said: “Obviously we don’t like the fact that it’s underperforming but correlations between assets have not been the same. Things have been correlated very differently so when you might have once had correlations between, say, emerging market debt and high yield versus government bonds – that might have been dislocated in the next week.”
“You would have hoped with a portfolio like GTR, where they’re running lots of different strategies, they’d be able to weather that but they’ve been having a tricky time. From our perspective, we’re quite glad that the two funds tend to do better at different times because that means they tend to complement each other quite well.”
