However, with the future for bonds looking uncertain and as equity valuations have come a long way since the market bottomed after the financial crises, professionals – such as F&C’s Rob Burdett – have been upping their exposure to genuine multi-asset absolute return funds to protect their clients from likely volatility and to mitigate growing risks.
The two IMA Targeted Absolute Return funds which are highest-rated by FE are Standard Life Global Absolute Return Strategies (GARS) and Insight Absolute Insight, but both have very different styles which make them appropriate for different investors.
Most investors will have undoubtedly come across Standard Life GARS in the past and, given that it is the largest UK fund with a staggering AUM of £20bn, most investors probably have money in it as well.
The Insight Absolute Insight fund, which is headed up by Sonja Uys and FE Alpha Manager Reza Vishkai, is considerably smaller at £655.9m, but is becoming increasingly popular with fund selectors.
Both portfolios were launched within 18 months of each other, with the Insight fund opening in February 2007 and Standard Life GARS in May 2008.
According to data from FE Analytics, while both funds have delivered a positive in return in each discrete calendar year between 2009 and 2013, GARS has outperformed the Insight fund in every one of those years.
Source: FE Analytics
That means, for instance, that since Standard Life GARS was launched it has returned 42.9 per cent, while Insight Absolute Insight has returned 32.26 per cent over that time.
However from a risk-adjusted return basis, which is one of the primary factors fund selectors use when assessing an absolute return fund, Insight seems to have come out on top as it has protected its investors more effectively during periods of market stress.
Take the the financial crash, for example. GARS lost 5.26 per cent between May 2008 and January 2009 and while Uys and Vishkai’s portfolio didn’t deliver a positive return, it only lost 1.41 per cent over that time. Insight Absolute Insight also only lost 0.81 per cent in 2008 as a whole.
It was a similar situation in 2013 when former Fed Chairman, Ben Bernanke, warned the market that he would consider “tapering” his quantitative easing programme. The announcement last May caused nearly all asset classes to correct, with the prices of equities, bonds and commodities all falling considerably.
As the graph below demonstrates, that wholesale sell-off hurt Standard Life GARS in particular while Insight Absolute Insight seemed largely unaffected.
Performance of funds in 2013
Source: FE Analytics
For instance, between the end of May and June last year, GARS lost a hefty 5.26 per cent while the Insight fund lost just 0.13 per cent.
That disparity in performance is reflected in the two portfolios’ capital preservation characteristics as, since GARS was launched in May 2008, it has had a much worse maximum drawdown and downside risk than the Insight fund.
Its annualised volatility has been 6.85 per cent over that time, while Insight Absolute Insight’s has been 2.15 per cent. The Insight fund has also had a much better Sharpe ratio over that time, which is the standard measure of risk-adjusted return.
The ratio measures a fund's return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund's volatility.
While both portfolios sit the IMA Targeted Absolute Return sector and both have broadly the same objectives, the make-up of the two portfolios is different.
As FE Trustnet has highlighted in the past, Standard Life GARS’ team run around 30 different strategies within the portfolio.
All decisions within the fund have to pass through three teams. The first team are the economists, who analyse macro data and try to identify short and long term themes. That is then passed onto the implementation team, who attempt to find ways to play those themes on a risk-adjusted basis.
Finally, that goes to the risk team who make sure that the new strategy doesn’t distort risk levels elsewhere in the portfolio.
These strategies tend to be long-short trades across different asset classes and currencies.
Insight on the other hand, is effectively a fettered fund of funds, as it is made up of the Insight’s UK Equity Market Neutral, Currency, Credit, Emerging Market Debt, Absolute Return Equity and Liquidity funds.
Uys and Vishkai blend and diversify across those funds to try and have a lowly correlated, low risk-profile, portfolio.
Currently, the managers have the bulk of their portfolio spread across the UK Equity Market, Currency, Credit and Emerging Market Debt funds.
The expert's view
Rob Gleeson (pictured) head of FE Research, rates the two funds highly as both of them feature on the FE Select 100.
He says that, while the Insight and Standard Life funds are set up differently as the former tends to use market neutral techniques and the later can take a more directional view, they are both run along similar lines as the two sets of management teams are trying to blend different absolute return strategies. In terms of which is best for a certain investor, Gleeson says it all comes down to their investment horizon.
“Insight Absolute Insight’s absolute return target is one year, while GARS’s is three. That is the difference, as GARS can theoretically lose money over 12 months, but that doesn’t usually happen, while the Insight fund has a much shorter horizon,” Gleeson explained.
“The strategies are very similar though; Insight allocates to six different funds and will blend them on a diversified basis to create a low risk portfolio with low correlation. GARS does the same thing, they just use 30 strategies.”
“They also pretty much the same in terms of their use of derivatives, which you could say is risky, but they are very well-calculated and counter-party risk is managed carefully.”
“GARS will be slightly more volatile because it has a three year horizon, but this is comparing a short-term fund against an ultra-short-term fund.”
Standard Life GARS has an ongoing charges figure (OCF) of 0.84 per cent while Insight Absolute Insight’s OCF is slightly higher at 1.01 per cent.
Gleeson says one aspect that investors should look at is Insight Absolute Insight’s performance fee, which is 10 per cent if it outperforms its benchmark. Given that the fund is only trying to beat LIBOR, Gleeson describes the fee as “tight”.
However, while that is a slight frustration for Gleeson, he still rates the fund as one of the best in the sector.
