Their popularity has grown sharply with increased volatility in equity markets and in response to the number of equity funds producing negative returns.
Net retail inflows into the absolute return sector in August accounted for £150.3m. Property funds saw net retail outflows of £42.4 million. However, the sector with the biggest net retail outflows in August was the Europe Excluding UK sector which suffered £143m outflows.
Richard Saunders, chief executive of the IMA, said: "August's figures are an improvement on the retail outflow in July, albeit a modest one. Investor sentiment remains cautious during this time of volatility with Absolute Return funds continuing to be the most popular sector."
In terms of performance, BlackRock’s UK Absolute Alpha fund stands out as the top absolute return fund, returning 8.13% given a volatility of 4.67% - a risk-reward combination that has seen the fund attract £842m of investors’ cash over the last six months.
Other absolute return funds have attracted much smaller amounts of investment during the same time period. According to Financial Express, Newton Absolute Intrepid fund, for example, has only grown by £85m, up from £342m to £411m, and Threadneedle’s Absolute Return has recorded an increase of £9m, up from £52m to £61m.
The fund also features prominently in Fidelity FundsNetwork’s August statistics, achieving second place in the firm’s top ten best selling fund in all channels and product wrappers. It was the fourth best ISA seller, and the eighth best SIPP seller.
Harpreet Sajjan, analyst at Financial Express Research, said: “If investors are purely seeking absolute return funds for their low volatility feature then these vehicles don’t disappoint given that almost every fund operating within this space maintains attractively low figures. Furthermore when comparing these funds on a relative basis they appear perfect, as almost all have outperformed the FTSE’s losses over recent periods.”
However, Sajjan warned, given their aim of ‘absolute’ returns renders any assessment against relative benchmarks meaningless.
He added: “When glancing at returns in this light, the picture is less perfect, given that very few funds don’t do what they say on the tin, i.e. to return in all market conditions. The evidence points towards the infamous BlackRock UK Absolute Alpha fund as very few have managed to match its performance.
“Investors must maintain a selective approach towards funds operating within this space, to avoid getting bitten by those dogs that do exist.”
Looking ahead at the market outlook for absolute return funds, in his Trustnet IMA Absolute Return report, Sajjan writes: “Despite the current investment climate supporting these vehicles, our concern revolves around the abilities of such funds to keep up with long only alternatives if markets begin to recover – thus highlighting the importance of market direction for these funds.
"Another notable drawback for absolute return vehicles is the FSA’s ban on shorting financial stocks, which can have a major impact on returns considering that many funds maintain outstanding short positions.
“As we expect markets to continue their down trend, absolute return funds stay attractive. Investors should nevertheless remain selective and seek out those fund managers displaying a superior ability to take directional bets on stocks. As the IMA only have an inclusion of 14 funds, investors may also want to draw their attention to Financial Express’ Absolute Return sector which maintains a broader inclusion of 47 funds for investors to pick from.”
Commenting on the IMA figures, WINS Investment Companies Research said:
“One of the few bright spots in recent IMA data has been the absolute return sector which was introduced as a separate category in April. In the last five months, £900m has flowed into this sector, significantly ahead of any other single sector.
“However, the recent experience of the investment trust sector suggests that these inflows may be tempered over the next few months. Discounts have widened significantly in the closed-ended hedge fund universe this month and several fundraisings have been postponed.
"We believe that it is premature to call the end of the hedge fund boom in the closed-ended sector, although there is clearly nervousness ahead of month-end results for September.”