Only 34.5 per cent of IA Targeted Absolute Return funds have managed to deliver a positive return during the FTSE 100’s 20 per cent fall, according to FE Analytics, with the three largest members of the peer group such as the £26.7bn Standard Life Global Absolute Return Strategies (GARS) fund among those sitting on a significant loss over that time. 
It has been a disastrous start to 2016 for most equity investors as fears of a hard landing in China, increased geo-political tensions and a plummeting oil price have caused all major developed market indices to post hefty losses.
As a result of 2015’s falls and the rocky start to the new year, the FTSE 100 has now officially fallen into bear market territory as the blue-chip index has lost 20 per cent in price terms since its peak in April 2015.
Unfortunately for those who follow a traditional asset allocation model, such as using fixed income to dampen down volatility, the large majority of bond indices are also in negative territory over that time thanks to high valuations and therefore low yields going into the period.
It is in this sort of environment where many investors would have hoped their absolute return funds, an area of the market which has largely been untested due to their relatively recent arrival into the retail space, would have come into their own.
But with falls in both equity and bond markets, FE data shows the large majority of the 87 IA Targeted Returns sector’s members have failed to make an ‘absolute return’.
Performance of sectors versus index during the FTSE’s bear market
Source: FE Analytics
According to FE Analytics, the IA Targeted Absolute Return sector average has lost 0.95 per cent since 15 April 2015 while the FTSE 100 – in total return terms and therefore with dividends reinvested – has lost 17.96 per cent.
However, when you drill down deeper, it is a far more negative picture emerges for the somewhat mixed bag of a sector.
Our study shows that just 30 of the 87 funds in the sector (or 34.5 per cent) have managed to make a positive return. Given there are a number of behemoths in the sector which are the go-to products for most investors, it is also worth mentioning how the average unit holder in the peer group has performed over that time.
The picture is even worse in that regard as of the £75.68bn of assets in the sector, some £62.24bn of that (or 79.1 per cent) is sitting in loss-making funds during the period in question.
That is largely a result of the three largest funds in the sector – the £26.7bn Standard Life GARS, the £9.1bn Newton Real Return and the £4.3bn Invesco Perpetual Global Targeted Returns funds – which have lost a respective 4.27 per cent, 4.39 per cent and 2.8 per cent.
Nevertheless, nine of the next 15 largest funds in the peer group also in negative territory since mid-April 2015.
Performance of funds during FTSE’s bear market
Source: FE Analytics
Of course, this data needs to be put into context.
First and foremost, funds within the sector have very different aims and objectives as while some aim to deliver a positive return of 12 months, others aim over three years and some just try to deliver decent absolute returns with low volatility over the medium term.
Secondly, investors have had very few places to hide since the FTSE 100 tumbled from is plus-7,000 high last year.
FE data shows, for example, that the IA Targeted Absolute Return sector has one of the lowest proportions of loss-making funds since April 2015 out of any of the major peer groups in the open-ended fund universe.
In fact, the only sector to have fewer loss making funds is IA Property at 58.14 per cent – though that must be caveated by the fact that a significant proportion of its members are priced less frequently than any other sector, which means the figures could be distorted.
Proportion of loss making funds in IA sectors during the FTSE’s bear market
Source: FE Analytics
Continuing this theme, as the table above shows, every fund in the IA UK Gilts, IA Sterling Strategic Bond, IA Mixed Investment 20%-60% Shares and IA Mixed Investment 0%-35% Share sectors – which are where many investors look for funds to diversify their equity exposure – has lost money over the period.
Nevertheless, there have been a number of industry commentators who have voiced concerns about investors piling into certain absolute return funds in the belief that they will grind out returns no matter the financial backdrop, despite the fact that it is a relatively new concept in the world of retail investment.
In December 2014, for example, Square Mile’s Richard Romer-Lee said that most of the peer group hadn’t witnessed a “messy bear market” and therefore couldn’t be adequately analysed.
“What we have seen since [the crash] is a lot of the retail focused asset managers started to invest in risk systems and in fund managers with the right experience in creating a different range of outcomes in the alternative or absolute return world,” Romer-Lee said.
“We’ve seen lots of strategies launched since then which haven’t really been tested and when the doomsday comes it will be interesting to see how many of those do well and how many of them can give you an acceptable asymmetry of risk.”
He added: “On average, it’s like any sector, some of them are really good, some are not and quite a lot of them are unproven.”
One could even question how proven the highly popular Standard Life Investments GARS fund has been, even though it launched into the retail space in May 2008 and therefore just months before one of the worst financial crises in history.
While the fund has returned 50.36 per cent over that time with an annualised volatility of 6.43 per cent and a maximum drawdown of 12.58 per cent (compared to a 20.22 per cent return, 20.2 per cent annualised volatility and 42.09 per cent maximum drawdown from the FTSE 100), FE data suggest investors would have seen better risk-adjusted returns from a UK gilts tracker.
Performance of fund versus indices since launch
Source: FE Analytics
The Barclays Sterling Gilts index, for instance, has made 64.64 per cent over that time with the same level of volatility but a lower maximum drawdown.
Even more cynically, during periods where GARS seemingly came into its own such as during the depths of the global financial crisis, you could say the strategy wasn’t really tested given traditional ‘safe’ government bonds rallied hard.
Again though, the fund does aim – by investing across a broad range of strategies such as market neutral, currency and pair trades – to generate positive returns over rolling three-year periods (rather than the 10 months we have highlighted) and the usual disclaimer of ‘the past is no guide to the future’ must be taken into account.
Nevertheless, are investors in the widely-held fund right to be worried or frustrated by GARS’s losses since the FTSE’s free fall? 
Mark Dampier, head of research at Hargreaves Lansdown, doesn’t think so. He points out that the major problem with funds like GARS is investor mentality as they need to realise that no manager will always be able to generate positive returns.
“If the market is down 17 per cent and GARS is down 4.5 per cent, I would say that is quite good,” Dampier said.
“I’ve got some GARS and I would admit that it hasn’t had a great six to nine months, but it hasn’t been disastrous. These funds aim for capital preservation but they can’t completely surrender upside potential. I’m pretty happy that the fund has only lost 4 per cent or so when the FTSE is down 17 per cent, and if you’re not happy, should you really be investing in the first place?”
“If GARS had fallen 13 per cent then I would say that was a disaster, but they have to have some exposure to upside potential as they need to participate. You can’t turn lead to gold, but certain investors think there are managers that can always make money but the truth is they can’t.”
