The likes of Jupiter Absolute Return, Newton Real Return and Miton Total Return are among the portfolios in the IA Targeted Return sector to have beaten equities for total return as well as delivering half of the volatility in 2016 so far, according to research by FE Trustnet.
In what was the worst start to any year on record for financial markets, 2016 began with a massive sell off which has turned into a sharp v-shaped recovery. However, sentiment has not been materially lifted by the return to positive territory for risk assets and many concerns continue to dog investors.
According to FE Analytics, this has meant while equities have trended back, gold and bond indices have nudged higher as shown in the graph below.
Performance of indices in 2016
Source: FE Analytics
Demand for absolute return funds has also increased, having been ticking up in recent years with the IA Targeted Absolute Return sector’s most popular portfolio – Standard Life Global Absolute Return Strategies – also being the largest in the whole Investment Association’s 3,500-strong universe.
In total there are 16 funds in the IA Targeted Return sector – out of 102 – that have beaten the MSCI World index year-to-date but many of these are fixed income focused or have done so with higher volatility. Only four have done so with half of the volatility of the same index.
Of course, this not the acid test for absolute return funds which tend to have a three year time horizon in which they aim to deliver a positive return, but considering the perilous conditions of markets this year it is warmly welcomed by investors in these funds.
The table below shows these funds, their return and volatility versus the MSCI World so far in 2016.
Source: FE Analytics
James Clunie’s £298m Jupiter Absolute Return fund is top of the list for total return this year. Since it launched in 2007 it has had only one downmarket period. This was in 2015 when it lost 0.22 per cent.
However, Clunie has only managed the long/short fund since September 2013. At the end of last year he went ‘net-short’ for the first time since taking over the fund, meaning the manager has more exposure to short positions – i.e wagering that certain stocks will fall – rather than in long positons, which is the expectation of seeing a rise in its share price.
He told FE Trustnet recently that his short book is brimming with ideas as he thinks developed market equities are unlikely to make much progress over the long term, especially in the US.
FE Alpha Manager Iain Stewart’s £9.3bn Newton Real Return fund also scored highly. The manager has headed the fund since 2004. His process, which aims to generate returns of cash plus 2.5 per cent net of fees while maintaining a volatility between that of equities and bonds.
This has paid off with the fund ahead of the FTSE All Share index in terms of total return with much lower volatility since he took over.
Performance of fund and index under manager tenure
Source: FE Analytics
Invesco Perpetual Global Targeted Returns and CF Miton Total Return are the last two on our list, having both just beaten the equity market. They are also, respectively, the second and first lowest for volatility of those discussed in this article.
Many experts have also told FE Trustnet that they are increasingly favouring absolute return type funds in 2016 such as Tilney BestInvest’s Jason Hollands and City Financial’s Peter Toogood.
However, there is much debate regarding the value of low volatility funds such as those discussed above or high volatility portfolios.
Hollands, says it is case that a number of well-regarded long/short funds – that have tended to more volatile - have been wrong footed of late.
“[This is from] the recent strong bounce in emerging markets and commodities. Some of that rebound has been down to the dollar weakening, but also a dose of credit expansion in China and market euphoria over steps to impeach Dilma Rousseff in Brazil.”
“I’m told the recent rally in commodities an EM equities has forced a lot of hedge funds to close out short positions, so there are some technical reasons why the rally in commodities and emerging market stocks could have got ahead of itself and more recently, we’ve seen hopes of a deal in Doha to limit oil supply disappoint.”
He thinks this phenomena could reverse throughout the rest of 2016 with some higher volatility absolute return funds doing better.
“China’s latest round of stimulus could well be a first half story – China should still worry investors as its debt to GDP has recently hit a record 247 per cent, conditions which could give way to a credit crisis.”
Peter Toogood, investment director, City Financial thinks absolute returns are only option barring cash at present for investors.
“Equity prices are increasingly out of touch with economic reality.”
“Our advice has been unwavering throughout this period, namely, if you must invest in risk assets, favour absolute return funds. We appreciate that absolute return funds are not everyone’s cup of tea and if that is the case, we would suggest you stay on the side lines in cash.”
