BlackRock UK Absolute Alpha, Invesco Perpetual Global Targeted Returns and Jupiter Absolute Return are among some of the most attractive targeted absolute return funds within the Investment Association universe, according to Tilney Group’s Matt Dickens.
The director of fund research at the firm said some alternative assets can provide a substitute to how traditional bonds – formerly seen as safe and reliable assets – used to behave before yields fell to historic lows and volatility in the sector picked up.
Performance of sector vs index over 1yr
Source: FE Analytics
This is despite the fact many investors are nervous about the funds residing in the IA Targeted Absolute Return sector, given the significant losses a number of its constituents suffered over the course of 2016. Data from FE Analytics shows that six of last year’s worst performers all have absolute return mandates.
“In terms of the sector, it covers all manner of sins,” Dickens said. “You can probably say that for the whole of the UK fund management industry; there are some very diverse levels of quality in there and the IA Targeted Absolute Return sector is very much a microcosm of that.”
In order to sort the wheat from the chaff when it comes to fund selection, Tilney Group abides by its ‘Ten principles of manager selection’, which includes ensuring managers have a focus on increasing wealth, long-term horizons, are unconstrained by a market benchmark and are concerned with business risk as opposed to price risk.
Another crucial factor on the list is having a “clear, unambiguous statement of investment objectives”, something which multi-strategy funds have come under fire for in the past.
“For us, as well as having those 10 principles, it is trying not to overreach,” Dickens explained. “As a minimum, we just want targeted absolute return funds to give us a return in real terms, otherwise why wouldn’t we just hold cash?
“We also have a return target and a Sharpe ratio target for our funds in general. That means you can cut out huge amounts of that sector where the risk controls haven’t been in place or the volatility bands are just too high.
“If you refine it down and say, ‘actually, I want it to do a very specific job for me, I don’t want it to do any more than what fixed income used to do for me’, then actually you can stick to quite a few consistent funds. The problem is you have these polar extremes residing in one sector.”
Examples of funds in the IA Targeted Absolute Return sector which Tilney Group uses across its strategies are listed in the below article.
Invesco Perpetual Global Targeted Returns
First up is Invesco Perpetual Global Targeted Returns, which resides in the firm’s multi-strategy portfolio. This portfolio targets a 200-basis point return in excess of 10-year gilts over rolling 12-month periods, in addition to a Sharpe ratio (which measures risk-adjusted returns) of 0.8.
The £10.1bn fund, which is co-managed by Dave Jubb, David Millar and Richard Batty, aims to achieve a positive return in all market conditions over rolling three-year periods. Specifically, it targets a return that is at least 5 per cent above UK three-month Libor while maintaining less than half the volatility of global equities.
The fund has indeed achieved this target over the last three years, having outperformed its benchmark by 10.98 percentage points with a total return of 12.5 per cent.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
It has done so with an annualised volatility of 4.13 per cent while, over the same time frame, the MSCI AC World index has achieved a volatility of 9.95 per cent.
The fund adopts a highly-diversified range of strategies spanning multiple regions and asset classes. It is able to use both directional and market neutral ideas, depending on where the managers deem to be appropriate.
Invesco Perpetual Global Targeted Returns has a clean ongoing charges figure (OCF) of 0.87 per cent and yields 1.51 per cent.
Aviva Investors Multi Strategy Target Income
Also in Tilney Group’s multi-strategy portfolio, Aviva Investors Multi Strategy Target Income aims to achieve an annual yield of at least 4 per cent above the Bank of England base rate (before tax) regardless of the market environment.
As with many funds in the IA Targeted Absolute Return sector, it also aims to preserve capital and retain a volatility of it least half that of global equities over rolling three-year periods.
The fund, which is £2.5bn in size, has been headed up by a team of four managers – including FE Alpha Manager Nicholas Samouilhan – since its launch in 2014.
Again, the fund adopts a multi-strategy approach to portfolio construction and will hold a combination of ideas that are expected to perform well when markets rise or fall as well as market neutral plays.
Since launch, the fund has returned 7.1 per cent compared to the Bank of England’s base rate of 1.08 per cent. In terms of its risk metrics, it has done so with an annualised volatility of 4.21 per cent and a maximum drawdown – which measures the most money lost of bought and sold at the worst possible times – of 2.93 per cent.
What’s more, had an investor placed an initial £10,000 in the fund at launch, they would have by now received £1,113.15 in income alone.
Aviva Investors Multi Strategy Target Income has a clean OCF of 0.85 per cent and yields 4.4 per cent.
James Clunie’s £1.2bn Jupiter Absolute Return fund is also on Tilney Group’s ‘buy’ list, which aims to generate absolute returns over rolling three-year periods through a long/short portfolio of global equities.
The four crown-rated fund currently holds 119 short holdings and 86 long holdings, which include a physical gold ETF, BP, Burford Capital and Centrica.
The fund adopts a three-step approach to stock selection; the first of which relies on quantitative screens. The second step involves an examination based on bottom-up fundamentals and chiefly focuses on future cash flow expectations and how they’re reflected in the share price.
The third and final step is to gauge the likely behaviour of market participants on both the long and short side, although the manager principally focuses on identifying the short seller and how they could have access to better information than the wider market.
Over three years, the fund has comfortably outperformed three-month Libor with a total return of 14.27 per cent. Over this time frame, it has an annualised volatility of 5.93 per cent and a maximum drawdown of 3.36 per cent.
Jupiter Absolute Return has a clean OCF of 0.86 per cent.
Next up is BlackRock UK Absolute Alpha, which has been managed by Nick Osborne and Nigel Ridge since 2008 and 2013 respectively.
The £360m fund aims to achieve positive absolute returns on a 12-month basis in any market conditions and does so through long and short positions in UK stocks from across the cap spectrum. Its largest long holdings include the likes of RELX, British American Tobacco and Lloyds Banking Group, with its top 10 holdings accounting for 31.84 per cent of the overall portfolio.
It also uses futures and currently has a net 25.7 per cent short position against the index.
Over three years, the fund has returned 20.06 per cent while Libor GBP 3 Months is up 1.52 per cent over the same time frame.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
It has done so with a 4.12 per cent annualised volatility and a maximum drawdown of 2.3 per cent.
BlackRock UK Absolute Alpha has a clean OCF of 0.92 per cent.
Muzinich LongShort Credit Yield
Within Tilney Group’s fixed-income relative-value portfolio, the team holds the Ireland-domiciled Muzinich LongShort Credit Yield fund, which has an AUM of $2.2bn.
It aims to generate consistently attractive returns on a risk-adjusted basis over three to five-year periods and does so primarily through high-yield bonds priced in US dollars. Its largest long holdings include the likes of healthcare facilities operator Hospital Corporation of America, satellite service provider DISH DBS Corporation and medical supply company Fresenius Medical Care.
In addition to high yield, the fund also a 15 per cent net exposure to investment-grade corporates and uses credit default swaps, Treasury bills and Treasury futures.
Over three years, the fund has returned 12.84 per cent and has done so with a maximum drawdown of 12.07 per cent and an annualised volatility of 9.39 per cent.
Muzinich LongShort Credit Yield has a clean OCF of 1.67 per cent.