Finding attractive investment opportunities regardless of asset class is challenging in today’s market environment, according to Square Mile’s Victoria Hasler (pictured), who believes low bond yields and toppy equity valuations have limited options for investors. 
She told FE Trustnet that targeted absolute return funds could be a good option for those reluctant to hold onto cash but are afraid of buying into assets at the wrong time.
“Most years, there is something that looks attractive and right now it is hard to find that,” she said. “You can make arguments for things on a relative basis but, to find anything that you think is genuinely exciting is pretty hard at the moment.
“People want a certain level of income or capital appreciation to maintain their lifestyle and they have almost been forced into these risk assets. If the market suddenly cracks and you lose a lot of capital, it’s going to be even harder to make those gains going forwards.
“I think absolute return funds seem attractive because you have more of an idea of what you’re going to get; if part of the market tumbles they might still do okay. Maybe investors just need to understand that, for a while, returns are going to be lower than they have been.”
The IA Targeted Absolute Return sector came under fire at the start of the year, following lacklustre returns from many of its constituents throughout 2016.
In fact, data from FE Analytics shows that six of the 10 worst-performing funds within the Investment Association last year all reside in the IA Targeted Absolute Return sector.
While Hasler said significant losses over one year are of course bad news regardless of the performance aim, she pointed out most absolute return managers are trying to achieve returns over rolling three-year periods.
“To say that, over any short-term time period they have failed to achieve their objective because they have gone down, that isn’t necessarily the case. They have never said they’re never going to go down because that isn’t possible,” she explained.“The problem with the sector is that you have some funds trying to beat LIBOR plus 1.5 per cent and you have other funds that are trying to beat LIBOR plus 6 per cent.
“Obviously the ones at the top end of the range are going to be much more volatile. There are also extremely sophisticated long/short equity and market neutral funds that are using a lot of derivatives, but you also have some which are really very simple and are trying to achieve their aims through asset allocation. It depends on the preferences of the end investor.”
Arguably the most famous fund in the sector is the behemoth Standard Life Investments Global Absolute Return Strategies, or GARS, which is £24.1bn in size.
While it has proven to be immensely popular among investors, it came under fire for its performance in 2016, having lost more than 5 per cent at times and ending the year down 2.68 per cent.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
“I know they have had quite a bit of turnover on the team and returns haven’t been great this last year, but we still think it’s doing what it says it is going to do. All funds go through periods of difficulty, that’s normal,” Hasler pointed out.
“They’re a little bit below their target at the moment but not worryingly so, and they’re not losing money over a three-year period. Has it been brilliant? No. Is it seriously worrying? No, it’s okay. If it carries on having periods where it does badly that would be more worrying.
“At the time when they made the losses they did make a couple of bad investment calls and, realistically, everybody is going to have those. We’re all human and everybody makes mistakes and learns from them.”
Standard Life’s GARS has been awarded an ‘A’ rating by Square Mile for its strong investment team and sophisticated risk systems.
That said, the factsheet states that no approach is infallible and, although the fund navigated the 2008 financial crisis with only small losses, its approach is still relatively new in the investment world.
Not everybody shares this view, however. In an article published last year, Hargreaves Lansdown’s Mark Dampier told FE Trustnet that Hargreaves Lansdown stopped using GARS because of the complexity of its process and, because the team is so large, the fact any underlying changes could go undetected.
Hasler said: “I don’t think investors necessarily have to worry about the underlying team; there are a few guys that are in charge of running the fund - investors need to care about them and they need to care about the underlying team.
“There has been a lot of turnover and I think a lot of that has been quite natural. A lot of those guys have moved to Aviva or Invesco. But actually, the fact we now have three funds that are doing relatively similar things is good for investors.
“It’s good that there are competitors for GARS because actually it’s a little bit unhealthy to just have one enormous fund offering that mandate. The fact there is now more than one is good for investors and I think it’s good for the people running it as well. It keeps you hungrier.”
The research manager said turnover caused by the desire to move to younger, smaller competitor products is understandable. That said, if staff turnover remains high and is caused by other reasons – such as an overall dislike for the company- she said this would be cause for concern. Over the last year, though, she pointed out that the team has stabilised significantly.
Elsewhere in the IA Targeted Absolute Return sector, Hasler likes Vontobel TwentyFour Absolute Return Credit, which is a Luxembourg-domiciled Sicav managed by Chris Bowie.
“I like this fund because it’s quite simple. They have this core of short-dated corporate bonds which they are just buying and allowing to mature. Then they’re trying to add alpha around the edges,” she explained.
“This is the kind of fund that is absolutely not guaranteed to make money in all market conditions but, if you look at it over a three-year time horizon, because it has that core of bonds which will just keep maturing, it should tick along quite nicely. Then if you can get a bit of extra return on the top of that through alpha position, that’s even better.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
“I think as you go up the risk scale there are going to be times when these funds don’t do so well. GARS is an example which hasn’t done so well but it’s not surprising because the team is taking views and sometimes those views are not going to be right. With the best will in the world, everybody gets it wrong sometimes.”