Close to half of absolute return funds have lost money over 2016 so far, despite investors continuing to flock to the sector in search of safety from potentially challenging market conditions.
Figures from the Investment Association recently showed that IA Targeted Absolute Return was its most popular sector in August, with net retail sales of £480m. This followed sales of £490m in July, when it was the second best-selling sector.
Furthermore, the peer group has now been the best-selling sector for retail investors in eight of the past 12 months. The products have also been very popular with institutional investors over recent years.
However, FE Analytics shows that the average IA Targeted Absolute Return fund has had a less than spectacular 2016 to date, having made just 0.95 per cent.
Performance of sector vs indices over 2016
Source: FE Analytics
Despite the nervous tone that investors have taken at times, the chart above shows they would have still made more in UK equities (the FTSE All Share is up 15.19 per cent), government bonds (Barclays Sterling Gilts up 15.01 per cent) or gold (up close to 40 per cent in sterling terms).
Given that most absolute return funds are designed to achieve a positive return over rolling three-year periods, it could be argued that an average gain of close to 1 percentage point over nine months is a good outcome. But a closer look at the sector shows that a large share of its members are in negative territory this year.
According to FE Analytics, 47 of the 105 IA Targeted Absolute Return funds with a long enough track record – or 45 per cent of the sector – have made a loss in 2016 to date.
As the table below – which highlights the 20 making the biggest 2016 losses – shows, some absolute return funds are sitting on double-digit losses this year.
Source: FE Analytics
The £273m FP Argonaut Absolute Return fund, which is headed up by FE Alpha Manager Barry Norris, has made the largest loss in 2016 after falling more than 20 per cent. The fund aims for positive absolute returns in its sterling share class currency over a three-year rolling period; over three years it is ahead of its average peer by around 10 percentage points with an 18.13 per cent gain.
In his latest update, Norris explained that the losses made by the fund in August were down to its short book not through its long bets – a situation that seems to hold for the rest of the year. As the chart on the first page suggests, risk assets have performed surprising strongly over 2016, staging a strong rally from headwinds such as the Brexit vote thanks to continued loose monetary policy across the globe.
The manager said: “Abundant liquidity has made 2016 a very difficult year for our short book. However, expectations of further Fed rate hikes are volatile and sentiment can therefore quickly turn. We suspect that the withdrawal of US dollar liquidity will finally be a catalyst for generation of short alpha.”
While the sector’s largest member – the £26.4bn Standard Life Investments Global Absolute Return Strategies (GARS) fund – has made a 3.8 per cent loss over 2016, the fund that has proved to be most popular with investors has made positive returns.
The Invesco Perpetual Global Targeted Returns fund, which our data shows has taken in £2.7bn in net inflows over the past 12 months, has made 2.69 per cent since the start of the year. Since launch in September 2013, the fund has made a 17.87 per cent total return, outperforming its average peer and GARS, which is arguably its biggest rival.
Performance of fund vs sector over 2016
Source: FE Analytics
Explaining some of the recent drivers of the £6.8bn fund’s performance, the managers said: “Continued appetite for risk meant our more directional equity and credit ideas did well over [August], so our European, Global, Asian, German, UK and Japanese equity ideas all added to performance, as did our selective and US high yield credit ideas.”
Some 10 funds from the IA Targeted Absolute Return sector have made double-digit gains in the year to date.
As the below table shows, most of these top performers are absolute return bond strategies often in niche areas: emerging market debt and convertible bonds take up the top four spots.
Source: FE Analytics
Two ‘traditional’ absolute return funds (traditional in that they invest across all asset classes) can be found on the list of those up more than 10 per cent: Newton Managed Targeted Return and Jupiter Absolute Return.
Other funds that are up 5 per cent or more year to date include Newton Real Return (up 9.66 per cent), Threadneedle Dynamic Real Return (up 8.44 per cent) and SVS Church House Tenax Absolute Return Strategies (up 7.07 per cent).