Diverging monetary policy is creating ideal circumstances for absolute return funds such as the likes of Invesco Perpetual Global Targeted Returns and Natixis H20 Multi Returns, according to Mike Deverell (pictured), investment manager at Equilibrium. 
With a rate rise from the Federal Reserve in December 2015, a similar move in the UK by the Bank of England pushed back until at least 2017 and negative rates in Europe and Japan, it is fair to say monetary policy has moved into more extreme relative positions that it has done for many years.
This has been caused, many would argue, by the sell-off in stocks seen in the past year or so which largely emanated from concern over the Chinese equity market bull run and the swift devaluation of its currency the Renminbi as well as a rout in commodities.
This has served to make many investors more bearish, including Deverell, who has been reducing equity exposure of late. However, similarly this same trend has made him expect greater things from certain absolute returns which aim to make a positive return regardless of market conditions.
“We have reduced equity and are holding a lot more of what we would describe as alternative equity funds or absolute return funds,” he said.
“We like these [absolute return] funds at the moment. In this sort of environment there is a lot of opportunities for them to make money because you currently have a divergence between monetary policy in different parts of the world.”
“Divergence is a good time for absolute return funds – playing one thing off against the other.”
Deverell doesn’t opt for the largest and one of the most well-known funds in the IA Targeted Absolute Return sector, the £25bn Standard Life Investments Global Absolute Return Strategies fund (which is often abbreviated to ‘GARS’), he says however. Instead he has been buying four other portfolios in the sector.
These are Invesco Perpetual Global Targeted Returns, Natixis H20 Multi Returns, CF Odey Absolute Return and Old Mutual Global Equity Absolute Return.
A rival to GARS, Invesco Perpetual Global Targeted Returns has been making swift progress over the past year. It took in £3.8bn of new money over this period which was the highest in the whole Investment Association universe of circa 3,500 funds.
The fund aims to deliver equity like returns ahead of the LIBOR plus 5 per cent with less than half the volatility of equities over rolling three year periods, and it is on track to do having clocked up a third of the volatility of the MSCI AC World index and the FTSE All Share.
Since it launched in September 2013, it has returned 14.08 per cent. In comparison the MSCI AC World index has gained 22.95 per cent and the FTSE All Share gained 6.74 per cent.
Performance of fund and indices since launch
Source: FE Analytics
David Millar, Dave Jubb and Richard Batty manage the fund, having previously been members of the investment management team of GARS. Millar (pictured), Batty and Jubb, joined GARS in 2008 but moved to Invesco Perpetual in 2012, where they launched their rival fund one year later.
Jeremy Touboul and Vincent Chailley have managed the £278m Natixis H20 Multi Returns fund since it launched in October 2013.
The managers invest across fixed income, equity and currency and seeks and hold risk management as a core portfolio theme, yearly volatility between 5 per cent and 10 per cent over the investment horizon.
Deverell says they are two of his favourites while the – relatively – fledgling Natixis fund is “particularly very interesting.”
“They can do currencies, they can go both go long and short on bonds and equities, and do various other things,” he said.
Invesco Perpetual Global Targeted Returns has a clean ongoing charges figure [OCF] of 0.87 per cent. Natixis H20 MultiReturns has a total expense ratio of 0.80 per cent.
The £994m CF Odey Absolute Return fund has been managed by James Hanbury since 2009. It has returned 45.62 per cent over the past three years. This is one of the highest in the IA Targeted Absolute Return sector where the average gain is 8.39 per cent, however it is has come at the expense of high volatility only slightly below that of the FTSE All Share index.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The fund has a clean OCF of 1.42 per cent and charges a performance fee.
Last up is the $5bn Old Mutual Global Equity Absolute Return, co-managed by Ian Heslop, Amadeo Alentorn and Mike Servent since 2009.
The fund was shown in a recent FE Trustnet study to be the most popular in its sector with fund of funds managers, over taking Standard Life GARS for the first time in the past few years that we have conducted the study.
Our data shows that the fund has returned significantly less than the MSCI AC World index since its launch in June 2009 but it has been considerably less volatile and protected investors far better against market falls.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The fund has a clean OCF of 0.84 per cent.
