Investors will often turn to the IA Targeted Absolute Return sector during times of volatility and general market stress – which are two themes that have aptly described what has happened over recent days and weeks.
While mainstream media attention has been dedicated to ‘Black Monday’ (which is understandable given the FTSE 100 suffered its biggest daily fall since the global financial crisis), equity markets have actually been on a longer downward trend thanks to plummeting commodity prices, China’s woes, a bond sell-off, fears of a rate rise and the Greek debt negotiations.
According to FE Analytics, the blue-chip index fell more than 15 per cent between late April and close of trading on Monday. While it recovered some of its losses on Tuesday, the FTSE is still down 13.1 per cent over that time.
Though the last five months or so have been tough for long-only equity funds, FE data shows that a number of absolute return funds have performed exactly has they were designed to with some even delivering double-digit returns.
As the table below shows, it has been UK long/short equity funds which have taken full advantage and the standout performer of those has been City Financial Absolute Equity.
Source: FE Analytics
The five crown-rated fund is headed up by David Crawford and has delivered stellar gains of more than 25 per cent since the wider UK equity market has been in free fall. As the graph below shows, the £127m has effectively been negatively correlated to the FTSE 100 over that time.
Performance of fund versus sector and index since April
Source: FE Analytics
Crawford is a firm believer that short-selling, or the practice of selling a borrowed asset in the hope of buying it back at a lower price, is one of the best ways to outperform and therefore uses his ‘short book’ as a tool for alpha generation rather than just a hedge against wider market falls.
When FE Trustnet spoke to the manager in May he explained that he was finding a number of attractive short opportunities.
“We would say, because the market is pretty bullish, there is more opportunity on the short side as some companies aren’t as good as the market thinks they are,” Crawford said.
There have been a number of drivers behind City Financial Absolute Equity’s outperformance, such as having a very low net exposure to the mega-cap end of the market – which has been hit the hardest due to high exposure to international trade.
On top of that, the manager has been net short the mining sector which has turned out to be a very successful call given huge falls in the commodity prices and data which suggests China is slowing at a faster than expected rate.
In fact, the FTSE All Share Mining index is down some 33 per cent since the end of April. Overall, though, the fund was only 37 per cent net long the market going into August which is likely to have driven outperformance as well.
The City Financial fund has a good long-term track record, but has exposed its investors to some large falls along the way. Since its launch in March 2008, it has returned a hefty 242.37 per cent meaning it has beaten the FTSE All Share by 190 percentage points.
Performance of fund versus index since launch
Source: FE Analytics
However, it has had a maximum drawdown of 26 per cent which while not as large as the FTSE All Share’s biggest possible loos, is still a considerable fall to take for more cautious investors.
Back to the study now and the next two best performing absolute return funds since April are again UK equity long/short equity offerings – namely Polar Capital UK Absolute Equity and Schroder Absolute UK Dynamic with returns of more than 10 per cent.
They are joined by other long/short equity funds in the top 10, such as Artemis Pan European Absolute Return, Artemis US Absolute Return, TM Cartesian UK Absolute Alpha, Old Mutual
UK Opportunities and RWC US Absolute Alpha suggesting it has been a market where stock pickers can genuinely add value.
The best performing non long/short equity portfolio has been the very nimble £10m JPM Multi Asset Macro fund which is headed up by the trio of James Elliot, Shrenick Shah and Talib Sheikh.
The fund, which aims to generate a positive return over every rolling 12 month period, uses a thematic process to portfolio construction and invests across global equity, bond and currency markets. It also uses derivatives for the purpose of risk management and in order to take advantage of the managers’ themes.
This process has worked well as not only has it returned 5.57 per cent during the recent sell-off, but it is also comfortably outperforming both bond and equity markets since its launch in April 2013 – albeit with a fairly high level of volatility.
Performance of fund versus indices since launch
Source: FE Analytics
Though certain funds have performed well in the recent environment, the sell-off has largely been a difficult time for the absolute return sector as 51 of its 86 constituents (59 per cent) have posted a loss since April.
Of course, that figure includes the likes of Premier Defensive Growth, Henderson UK Absolute Return and Kames Absolute Return Bond which have only fallen 0.1 per cent.
However, some have fared particularly poorly and one of the best examples has been Hugh Hendry’s CF Eclectica Absolute Macro fund. According to FE Analytics, it has been the sector’s worst performer with losses of 13.91 per cent.
Hendry famously changed his positioning within the fund in late 2013 from a very defensive one (he was one of many who had been dubbed ‘Dr Doom’) to a portfolio which was geared towards a cyclical recovery given that, with so much support from central banks, a risk-on period in equities seemed inevitable.
He also relaxed the risk parameters within the fund to give himself greater “breathing room”.
These calls did generate very high returns as CF Eclectica Absolute Macro, which had been long Chinese equities, generated a return of close to 50 per cent between late 2014 up until May this year. However, those positions (as well as Hendry’s big bets on Europe and Japan) have worked against him over recent months as sentiment has turned increasingly negative.
Performance of fund versus sector and index over 2yrs
Source: FE Analytics
While certain funds have been able to deliver a positive return during the recent sell-off, by way of assets, it seems most investors haven’t enjoyed a great time of it over the last few months.
That is because the two largest funds in the sector (Newton Real Return at £9.7bn and Standard Life Global Absolute Return Strategies at £25.8bn) are among the 10 worst performing portfolios during the period in question which losses of 4.56 per cent.
Combined, the two funds account for 53 per cent of the total assets in the sector.
In an article next week, we will take a closer look at why Standard Life GARS, in particular, has struggled during the correction and ask the experts whether the many, many thousands of investors in the fund should be concerned.
