Over the past 15 years, absolute return funds have been much talked about. Firstly, on the hope of uncorrelated returns with low volatility that outperform cash and bonds, albeit often with hefty performance fees and then followed by many an article discussing the disappointment of low returns while still paying those hefty fees.
The recent news that Abrdn is merging away its GARS fund (Global Absolute Return Strategies for relative newcomers to our industry) following years of disappointing returns, having previously been the category killer and grown to close to £30bn in size, has once again shone a spotlight on the whole sector.
The question now is what does this mean for the remaining 90 funds in the IA Targeted Absolute Return sector?
While a handful of absolute return funds have been in the retail space for many years, they exploded into life when GARS managed to deliver strong returns in the aftermath of the financial crisis when interest rates had cratered, and bond yields had followed suit.
Here was a nirvana where higher returns were possible without high correlation to equity and fixed interest markets. Funds sprung up all over the place and the IA Targeted Absolute Return sector over the 10 years from 2008 to 2017 had net flows of £66bn.
However, since that point, the tables have very much turned with five straight years of net outflows and £40bn flowing back out of the sector. But, with another £44bn remaining spread across 90 funds, where does that leave the sector?
The growth of absolute return funds was mainly in response to the low returns available from cash investments and the low yields on fixed interest. It’s fair to say we are in a completely different environment today, with fixed rate deposits offering 5%+ and bond yields back to levels not seen since before the financial crisis. As a result, investors looking for a high nominal return, potentially with lower volatility, now have choices which don’t have to cost a fortune.
With high inflation, high bond yields and high interest rates, the vast majority of absolute return funds have been a huge disappointment over the past year. Some 83 of the 91 funds in the sector have failed to beat inflation, 66 of them have failed to beat cash and 33 of them failed to deliver a positive return at all. If they are failing to beat the risk-free return, which is also a cost-free return, you have to ask the question about the point of their existence.
We have now reached the third year of the assessment of value process while we have also recently seen the introduction of the new consumer duty rules. Surely after years of repeated failure, this should be the catalyst for many of these funds that have failed to deliver for investors to be put out of their misery.
Add in the complexity of performance fee structures that many investors fail to understand and it’s almost impossible to justify what service they are providing to retail investors.
Ryan Hughes is head of investment partnerships at AJ Bell. The views expressed above should not be taken as investment advice.