Throughout 2014 the sector became increasingly popular as investors started to expect choppy, turbulent or even falling markets over the near term thanks to numerous factors damaging sentiment. Even FE Trustnet news editor Gary Jackson revealed he was using one for 100 per cent of his SIPP portfolio, partly because of uncertainty over the near-term direction of markets.
Absolute return funds promote themselves as trying to make a positive return – and most likely therefore beating cash – over a defined period, usually three years.
Investors seeking a safe haven from market volatility or some ballast in their portfolios sometimes view absolute return funds as the best alternative to cash.
Of the 16 funds that failed to generate a positive return last year, the biggest loss was from the £257m Schroder Absolute UK Dynamic fund, run by FE Alpha Managers Paul Marriage and John Warren.
The fund was down 8.58 per cent on the year, after strong returns of 18.51 per cent and 12.65 per cent in 2013 and 2012.
This, despite a shaky start to 2015, still translates into top quartile number over three years with a cumulative return of 20.28 per cent.
Performance of fund and sector over 3yrs
Source: FE Analytics
Other funds not achieving a positive return last year include Schroder UK Absolute Target, CF Richmond Multi Asset, Threadneedle Credit Opportunities, Aberdeen Absolute Return Bond, Ignis Absolute Return Government Bond and GLG Total Return.
Not all funds that lost money in 2014 managed to dampen down their losses with strong returns in the heady markets of the previous two years, like Schroder Absolute UK Dynamic did.
CF Richmond Multi Asset lost enough investor cash to bring down its three year track record - up to the end of 2014 – to a loss of 9.05 per cent. However, manager Joss Smith has only been at the helm since October 2013.
The £1bn Threadneedle Credit Opportunities fund did return a positive over three years despite a loss of 5.52 per cent in 2014. But at just 2.72 per cent this is less than the return of a cash ISA, which is typically at an annual rate of 1.5 per cent, as well as offering a lower real return due to inflation.
Performance of funds and sector in 2014
Source: FE Analytics
Other funds not to beat a cash ISA and inflation over this three-year period include Threadneedle
Absolute Return Bond, RWC Core Plus, CF Eclectica Absolute Macro, Jupiter Absolute Return and Schroder ISF Emerging Markets Debt Absolute Return.
However, even though they failed to beat a cash ISA, all of the above funds made their investors a small profit over the three-year period, aside from the Threadneedle fund which was flat.
The sector’s best performers last year were the £88m City Financial Absolute Equity, £103m Argonaut Absolute Return and £7m Natixis H2O MultiReturns funds, which all made double-digit returns.
City Financial Absolute Equity, managed by David Crawford, was the best with annual returns of 19.56 per cent. This follows another strong year – 2013 – where returns were 31.62 per cent. The three FE Crown-rated fund is uses a fundamental equity long/short strategy with an aim to achieve a positive return over rolling 12-month periods.
However, these three top-performing funds were also the most volatile over the three years with Crawford’s being most volatile as well as having the third highest maximum drawdown, which shows how much an investor would have lost if they bought and sold units at the worst possible times.
Arguably the sector’s most popular offering, the £23bn Standard Life Global Absolute Return Strategies (GARS) fund, had a respectable return of 4.83 per cent for 2014.
It also stood up well during the September/October sell-off in equity markets, which saw the FTSE All Share lose close to 10 per cent.
The UK index started falling around 4 September 2014, with worries over the Scottish independence referendum, the European recovery, geo-political tensions from Iraq to Ukraine and the threat of a pandemic from the Ebola virus adding to a heightened sense of risk among investors and fund managers.
As the graph below shows, the fund stayed ahead of both its sector average and the FTSE All Share between the sell-off and the end of the year.
Performance of fund, sector and index 4 Sep to 31 Dec 2014
Source: FE Analytics
Over this more recent period, the fund showed greater resilience than the previous time markets had such a rough time – May 2013, when investors fretted in what became known as the ‘taper tantrum’. In that May to August 2013 period GARS lost more than 5 per cent from peak to trough.