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The best absolute return funds at protecting your cash in 2015 so far

31 July 2015

Given their surging popularity and 2015’s topsy-turvy market conditions, FE Trustnet looks at the absolute return funds which have delivered the smoothest returns so far this year.

By Alex Paget,

News Editor, FE Trustnet

Kames Absolute Return Bond, Premier Defensive Growth and TM Sanditon UK Select have given their investors the smoothest returns out of the IA Targeted Absolute Return sector so far this year, according to the latest FE Trustnet study, as they have all had maximum drawdowns of less than 0.45 per cent.

It has undoubtedly been a difficult year for investors so far in 2015 – especially for those who are trying to run a diversified portfolio.

For example, following stellar gains at the start of the year thanks to relatively lacklustre returns in 2014, QE programmes in Europe and Japan and a rally in emerging markets on China’s stock connect programme and stimulus, equity markets have been far more volatile over recent months.

There have been a number of contributing factors to this phenomenon, such as the crisis surrounding Greece, huge falls in the Chinese market and the potential for an interest rate hike in the US. All told, the MSCI AC World index is down some 8 per cent since its peak in April.

Bonds, which have usually provided investors with a defensive anchor, have fared even worse.

Though no concrete reason has been given (trends such as a kickback against negative rates, improving economic data and a lack of liquidity have all contributed) yields on developed market government bonds have spiked since the start of the year, causing huge price falls across global fixed income markets.

What’s worse, with the US Federal Reserve expected to raise rates before the year is out, many experts have warned that these joint equity and bond market falls are only likely to continue.

This is a probable reason why the IA Targeted Absolute Return sector has shot up the sales tables, displacing the IA UK Equity Income sector as the most popular peer group in June with inflows of £445m (as FE Trustnet recently covered) as investors look to de-risk their portfolios.

Given their surging popularity and the increasing potential for rate induced volatility later in the year, here we look at the absolute return funds which have had the lowest maximum drawdown – which shows the most an investor would have lost if they had bought and sold at the worst possible times – so far in 2015.

 

Source: FE Analytics

While the industry standard is to document ratios on a monthly basis, given the short-term nature of this study, we have used weekly pricing for the research.

The sector is somewhat of a mixed bag, but the fund which has had the lowest maximum drawdown counterintuitively focuses on fixed income, namely Stephen Snowden and Colin Finlayson’s Kames Absolute Return Bond portfolio.


 

The most investors could have possibly lost from the £1.4bn fund so far this year is just 0.26 per cent, an impressive feat given the iBoxx Sterling Corporates All Maturities and Barclays Sterling Gilts indices have had respective maximum drawdowns of 6.06 and 7.20 per cent over that time.

The fund has very much acted as an anchor this year, as it has outperformed both corporate and government bonds with its small gain of 0.35 per cent. Kames Absolute Bond has the joint ninth highest number of positive weekly periods as well this year.

Performance of fund versus indices in 2015

 

Source: FE Analytics

The managers’ objective is to deliver cash plus returns with low market volatility, with little correlation to government bonds or credit spreads via a portfolio of pair trades, relative value trades and dynamic asset allocation.

This has worked well since its launch in September 2011 as while its gains of 7.88 per cent over that time aren’t awe-inspiring, its maximum drawdown of 0.26 per cent and annualised volatility of just 0.6 per cent over the period will have certainly comforted investors.

Unfortunately, investors who want ultra-cautious fixed income exposure now have to look elsewhere as Kames closed the fund earlier this year. On the brighter side, however, both BlackRock Absolute Return Bond and Royal London Absolute Return Government Bond also feature on the list with their maximum drawdowns of 0.66 and 0.44 per cent, respectively.

With a maximum drawdown of just 0.27 per cent, Premier Defensive Growth ranks second on the list.

Unlike any other in the sector, Paul Smith’s five crown-rated fund is a long-only portfolio of bonds, equities, cash and alternative investment strategies such as the BH Macro hedge fund.

While it is a relatively unknown fund in the sector with an AUM of £306m and has delivered a lower total return than many of its peers since its launch in December 2010, it has had lower annualised volatility, a lower maximum drawdown and a greater number of positive weekly periods than some of the sector’s heavyweights such as Standard Life GARS and Newton Real Return.

The team at iBoss is a big fan of the fund, but investment director Chris Metcalfe recently told FE Trustnet that the best way to maximise Smith’s strategy is to pair up his fund with Threadneedle UK Absolute Alpha – which is a long/short equity fund and, like the Premier fund, aims to generate a positive return over any rolling 12-month period.


 

Speaking of long/short equity funds, the recently launched TM Sanditon UK Select fund sits third on the list with a maximum drawdown of 0.44 per cent so far in 2014.

The portfolio, which is headed-up by the ex-Cazenove team of Tim Russell, Chris Rice and Julie Dean, is run using the business cycle approach with the managers currently running 31 long UK positions against 27 shorts.

As well as its ability to protect capital, the fund has only narrowly underperformed against the FTSE All Share since its launch in December 2014 with returns of 6.02 per cent.

Performance of fund versus index since launch

 

Source: FE Analytics

The fund uses bottom-up stock selection, but there is an overriding macro theme given the business cycle approach and in their most recent note to investors, the managers pointed out why using shorts and holding a more cautious portfolio will continue to be important.

“Chickens are coming home to roost. Global authorities have tried hard to reflate their economies through aggressive monetary stimulus, but whilst QE programmes have inflated asset prices it is not clear they will have lasting benefits to growth,” Sanditon said.

“There are plenty of pitfalls ahead and June has served as a useful reminder to investors that central bankers can't control all these events.”

Arguably the most well-known fund on the list is FE Alpha Manager Sonja UysInsight Absolute Insight fund with its maximum drawdown of 0.69 per cent.

It is one of the best rated funds in its sector, largely as a result of the manager’s ability but also because it is one of a very few in the peer group which has actually witnessed a market collapse given that it was launched in February 2007.

During the crash year of 2008, for example, it limited losses to just 0.17 per cent.


 

Its sits on the FE Select 100, as the FE Research team views the £844m fund as one of the best options for ultra-cautious investors.

“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 positive returns, minimise volatility and preserve investors’ capital,” the team said.

According to FE Analytics, while it has returned less than bonds and equities since inception, its returns have been far smoother than the two major asset classes and its maximum drawdown over that eight and a half year period is just 3.55 per cent, which is twice as low as gilts and 12.5 times lower than that of the FTSE All Share.

Performance of fund versus indices since launch

 

Source: FE Analytics

Insight Absolute Insight is a fettered fund of funds, as it only invests in esoteric portfolios run by the Insight team, as the FE Research team explains.

“The Insight Absolute Insight fund aims to provide incremental but steady returns while minimising losses. It invests in a handful of funds, all of which are managed by Insight and follow different strategies.”

One of which is the Insight Equity Market Neutral fund, which also features on the list with its maximum drawdown in 2015 of 0.47 per cent. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.