Absolute Returns or Absolute Rubbish?

Given the recent market turmoil and against a FTSE All Share drop of some -11.4% since the start of 2008 it seems an appropriate time to look at alternative investment strategies for clients who do not want the volatility of traditional stockmarket funds but do want to get a return above that offered by cash.

There are numerous options for clients such as commodity funds, fine wine funds and film partnerships, but many of these are relatively risky in their own right and while they may not be correlated to the performance of equity markets they can be too complex and risky for your average “high street” consumer.

Absolute return funds are now being promoted heavily as an alternative route. In a recent education guide published online, sponsored by Threadneedle, Absolute Return funds were defined as funds that:

“Aim to preserve a clients capital and consistently to achieve positive returns. Consequently, they are generally measured against cash, thereby having an ‘absolute’ value”

So now we know what they’re meant to do but do they actually do it?

Within Trustnet’s unit trust and OEIC Absolute Return sector there are 32 funds. At the time of writing this text, year-to-date performance figures for these funds ranged from a positive 5.6% to a negative -15.9% with the average being -3% across the 32 funds. Perhaps we’ve answered the article title already! There are a mix of both!

Of the top-10 performing funds year-to-date, Ruffer have 4 in the top-10 all producing positive returns in 2008. It would appear it is fulfilling the aim to “preserve a clients a clients capital and consistently achieve positive returns”, the top performing Ruffer European fund has produced positive returns on rolling one year periods for the past 5 years. Trevor Bradley, investment director at Ruffer explains how they do it:

“Ruffer has been concerned about levels of debt and leverage in the financial system for some time and our funds have been cautiously positioned accordingly."

"The total return fund will always include an allocation towards assets that we believe will be protective in nature such as gold, Swiss francs and short-dated gilts. This had increased to about two-thirds of the portfolio last year and had been a brake on performance. The European fund attempts to take a more nimble and active approach to asset allocation hence the current high cash weighting in the fund."

It would seem sensible for a cautious fund manager whose aim is simply to outperform cash to hold protective investments and accept reduced performance as a result. Could it be this approach that is keeping Ruffer in the top-10?

When we recommend these types of funds to clients I would imagine that most of them are left with the feeling that the fund, if run well, will never go down as they can make money in falling as well as rising markets. Clearly this isn’t the case.

Worst performing fund year-to-date, as of writing, is the Credit Suisse Target Return fund with a figure of -15.9%. This may be acceptable when we look at the markets since the start of 2008, but the fund has a 1-year figure of -16.3% and a 3-year performance of -8.9%, these figures include some very positive market conditions.

In summary, it is the same as with every other sector: there are good and there are bad, and IFAs need to ensure they rigorously research funds before investing clients' money. It is also key that these funds are not presented as an easy way to make money in a falling market. Remember, only the top eight funds out of 32 have a positive return for 2008.

It is reassuring to know that there are still relatively cautious funds that can make positive returns for clients and beat cash over the long term. Just make sure the one you choose for your clients gives Absolute Returns and isn’t Absolute Rubbish!

Kelvin Lillywhite is a financial consultant at Best Advice Financial Planning Ltd. The opinions expressed are his own and do not necessarily reflect those of his company. No recommendations are implied by publication of this text.

31 March 2008