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The expert’s top absolute return picks that can protect you during the current volatility

12 July 2022

Trustnet looks at fund pickers’ favourite absolute return funds as the sector “surges back into vogue this year”.

By Tom Aylott,

Reporter, Trustnet

Stock pickers have recommended absolute return funds managed by Blackrock, Ruffer and Troy Asset Management that perform well in market downturns due to their allocations to alternative assets as good options for investors in the current environment.

Funds across most sectors have struggled this year as the war in Ukraine accelerated global inflation and pushed central banks to be aggressive in their interest rate hikes.

Only 10 of the 52 sectors in the IA universe have managed to make a positive return in the past year and investors are getting cold feet.

As such, between January and May this year investors removed £3.6bn from equity funds to minimise their losses in declining markets, instead seeking out alternative options that will be stable where many others are wavering.

One option is funds in the IA Absolute Return sector, which aim to make a positive return in all market conditions. The uncorrelated nature of the sector could make it worth considering for investors looking to retreat from downward markets.

Darius McDermott, managing director of Chelsea Financial Services, said that finding an absolute return fund that suits your portfolio can be a difficult task due to the varying risk and return expectations, but said the Blackrock European Absolute Alpha fund is his personal favourite.

It invests in long and short positions across European markets and is up 3.3% over the past 12 months.

Analysts at Square Mile Investment consulting noted that its high alpha means “it should continue to deliver attractive and consistent returns on any extended rolling basis, coupled with a high degree of capital preservation in market downturns”.

McDermott said he has particular conviction in FE Alpha manager, Stefan Gries, and co-manager Stephanie Bothwell. Gries has led the fund since 2013, during which time it has made 39.3%, with Bothwell joining as co-manager in February 2021.

McDermott said: “The European team at Blackrock is one of the best resourced and have given strong returns on multiple products for investors over many years.”

Total return of fund since Gries has been manager

Source: FE Analytics

Alternatively, investors could consider the Fulcrum Diversified Core Absolute Return fund as a way to increase exposure to alternatives, according to James Penny, chief investment officer at TAM Asset Management.

He pointed out that absolute returns funds have “surged back into vogue this year” because of the positive correlation between equities and fixed income.

Bonds typically do well in market downturns as investors flee from equities, but this year they have tanked along with the rest of the market. Fulcrum’s fund, however, remains negatively correlated to equities with returns up 7.4% since the start of the year.

Total return of fund in 2022

Source: FE Analytics

Penny also finds its beta and return profile appealing, which he says is “essential” for a fund to perform well in a volatile market.

“Absolute return funds should never be seen as a one-stop shop for a full portfolio solution but, when used effectively in a blended portfolio, can add real value in both up and down markets,” he said.

Ben Yearsley, director of Fairview Investing, is not a huge fan of the IA Absolute Return sector, saying that the large majority of absolute return funds “deceive investors with only the manager getting rich from them”.

However, he highlighted two investment trust options that have similar mandates – making money in all market environments while limiting potential losses.

His picks behave similarly to absolute return portfolios but do so more consistently and with more attractive returns, according to Yearsley.

One he uses is the Personal Assets trust, which mostly invests in high-quality global equities, inflation linked government bonds, and gold, making a 61.6% return from doing so over the past decade.

Performance has dropped 3.2% in 2022, but Yearsley said that it is a good long-term holding to outpace inflation and avoid a permanent capital loss.

Another portfolio he likes is the Ruffer Investment Company, which climbed 73.4% over the past decade and has continued to ascend since the start of the year, up 4.4%.

Total return of trusts over the past 10 years

Source: FE Analytics

It has a similar goal to the Personal Assets trusts, aiming to beat the rate of inflation, but goes about it in a different way. Investments are spread across a much vaster pool of assets, most notably illustrated by the the trust’s investment in bitcoin in 2020.

Currently, more than a third of the portfolio’s top asset allocations are held in Illiquid strategies, gold and long-dated index-linked gilts.

Although they each take differing approaches to meet the same goal, Yearsley said that “there is no reason not to own both”.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.