Backing just one or two absolute return funds is likely to lead to frustration if either or both fail to perform, according to Janus Henderson Investors’ James de Bunsen, who argues in favour of diversifying these strategies just like equities.
De Bunsen – who manages the £134m Janus Henderson Multi-Asset Absolute Return fund – said although he remains sanguine about the outlook for 2019, investors will have to get used to a lower growth.
“People are getting used to going from having uniformly positive data, low inflation and low interest rates to having data that is mixed, [growth is] decelerating, more geopolitical noise and rising rates,” he said.
The multi-asset manager said equities are likely to be challenged as markets struggle to adapt to new conditions, while bonds are also on track to struggle as interest rates rise.
“Undoubtedly, we’re going to have a more interesting period for markets. Whether that’s an enjoyable one for investors is debateable,” de Bunsen said.
“When people are thoroughly relaxed because the economy is growing in a synchronised way across the globe and equities are marching higher, they don’t really think about downside risk – but I think everybody has to now.”
Performance of indices YTD
Source: FE Analytics
The MSCI World index has fallen by 3.22 per cent in 2018, so far, while the Bloomberg Barclays Global Aggregate index is down by 3.41 per cent, in US dollar terms, as the above chart shows.
As such, de Bunsen said investors should think about holding absolute return strategies able to protect capital in an environment where bonds and equities have been seen falling in tandem.
“Our view for a while has been that you can’t rely on the fact that a government bonds portfolio is going to bail you out every time equities sell off,” the Janus Henderson manager noted. “If you look at the late 1980s and 1990s equities and bonds were positively correlated but everyone’s grown very used to the fact that they have been negatively correlated since 2000.
“I still think when there are proper bouts of risk aversion government bonds are going to do well, but I don’t think that portfolio construction is going to be as reliable going forward as it has been over the past 15 years.”
Absolute return funds have earned a somewhat mixed reputation among investors over their claims to deliver in all market conditions. They have underperformed traditional asset classes in recent years, although the sector remains the third largest in the Investment Association universe with £77.3bn in funds under management.
“We think absolute return is where people should be looking to allocate at the moment, but I don’t think people have had that much joy about where they allocate,” de Bunsen said.
“People understand that if you buy equities you need to diversify your portfolio, but in absolute return funds – which have high dispersion of returns between them – people just buy one or two and end up disappointed if one or both don’t do well.”
De Bunsen said his Janus Henderson Multi-Asset Absolute Return fund – which he manages alongside Peter Webster – sits at the more defensive end of the absolute return spectrum, with a greater focus on capital preservation.
“A lot of the category killers who have raised all the assets have quite punchy targets cash plus 5 per cent, that type of thing,” he said. “That’s what equities have done over the long term, so it’s really quite a big ask to get those kinds of returns over the very long term.”
The manager said he instead tries “to allow investors sleep easy at night”, generating a positive return while minimising drawdown.
De Bunsen said the portfolio’s equity exposure has been taken down to around 10 per cent, “which is about as low as it ever has been”, although he noted that it had been very early in making the decision to reduce exposure.
It followed a challenging year for the fund with low volatility ensuring that there were fewer value opportunities to take advantage of.
Performance of VIX in USD over 2yrs
Source: FE Analytics
“Last year was frustrating for us because there was just no volatility in markets and it was becoming really tedious,” he said.
“We want to keep things as simple as possible we want to by equities and bonds because they’re very straightforward. We understand them very well, we have data going back over 100 years, and we understand how they react in different times and parts of the cycle.
“But if they’re just going up with no volatility you don’t get a chance to refresh your portfolio.”
As such the managers have added more exposure to uncorrelated strategies and alternative funds, where they believe decent returns can still be made.
“We’re not having to cough up and pay very high valuations and accept very low yields like we would if we could only buy equities and bonds,” de Bunsen explained.
Janus Henderson Multi-Asset Absolute Return still has significant fixed income exposure, with a 23 per cent allocation to the asset class, although it holds non-typical assets, such as short-duration government bonds, emerging market debt and a royalty-backed credit strategy.
There is one more traditional asset class that the manager has been adding to more recently: US government bonds.
“We have for the first time ever, I think, started buying US Treasuries,” he said. “We felt that when yields got to 3.25 per cent that was our buy signal, [although] we’ve only got 3 per cent in Treasuries.”
Other returns have come from the fund’s long/short equity strategies, which are more market neutral in their nature given the managers’ focus on capital protection.
“You’ve got some rocket fuel-type long/short funds that take quite a lot of equity risk,” he said. “They are either up 15 per cent or down 20 percent. The ones we are looking at are taking very little market risk.”
In the alternatives space, de Bunsen said the portfolio is invested in a commodities strategy benefiting from inefficiencies caused by passive exchange-traded funds, as well as infrastructure investment trusts HICL Infrastructure and International Public Partnerships – both of which are top-10 holdings.
“Those sorts of investment trusts have very reliable long-term revenue streams, quite often inflation linked and are government-backed essentially,” he said.
“They were quite cheap earlier in the year on political risk that if the Labour Party got in they would nationalise these assets, so the share price came off 15 20 per cent and we really built positions there.”
Other top-10 holdings include offshore multi-asset strategy Plurimi Diversified Dynamic Solution, iShares GBP UltraShort Bond Ucits ETF, BH Macro, F&C Global Equity Market Neutral and Majedie Tortoise.
Performance of fund since launch
Source: FE Analytics
Since launch in October 2008, Janus Henderson Multi-Asset Absolute Return has delivered a total return of 38.62 per cent compared with a 34.69 per cent gain for its average IA Targeted Absolute Return peer, although the sector is home to a broad range of strategies.
The fund has an ongoing charges figure (OCF) of 0.96 per cent.