There is little doubt that 2014 was a difficult year for most UK investors.
Not only did the UK equity market have a volatile and poor year – the FTSE All Share made just 1 per cent and had a maximum drawdown of 8 per cent – but areas they were told to avoid on valuation grounds, such as government bonds and US equities, had a barnstorming year.
Performance of indices in 2014
Source: FE Analytics
However, data from FE Analytics shows a large proportion of funds within the IA Targeted Absolute Return sector – which most investors use as a form of protection against general market volatility – failed to cope with last year’s challenges like equity market sell-offs, a huge fall in the oil price, European deflation, increased geo-political risk and concerns over the possibility of higher interest rates.
A number of industry experts, such as Square Mile’s Richard Romer-Lee, have warned that most absolute return funds have yet to be tested in bear markets and our most recent study suggests that investors cannot simply rely on them to safeguard their savings.
Data from FE Analytics shows 22 per cent of funds posted seven or more monthly losses last year, while 38 per cent posted losses in six or more months in 2014.
It must be said, of course, that the IA Targeted Absolute Return sector is a real mixed bag as different funds have very different stated aims and objectives, as some only try to deliver returns with a low level of volatility while others aim to deliver an ‘absolute return’ over rolling one or three-year periods.
Nevertheless, the study suggests that 2014 was a year to forget for a large number of managers in the sector.
An example is Aberdeen Absolute Return Bond. The £240m fund has a stated objective of trying to deliver a positive return over rolling 12-month periods, but it lost money in nine months last year and ended 2014 with a loss of 3.94 per cent.
This means it failed to meet its objective in the last eight months of the year.
It is a similar situation with Ian Winship’s BlackRock Absolute Return Bond fund, which also aims to make money over any given 12-month period. It lost 0.38 per cent last year and only had three positive months, though on a rolling basis it only failed in its objective in December.
Some of the other high profile casualties of last year’s volatility include FE Alpha Manager Iain Stewart’s Newton Real Return fund and the £335m Schroder UK Absolute Target fund, which is headed up by FE Alpha Manager Steve Cordell.
Both have longer absolute return aims than most in the sector, though the Newton fund and Schroder fund lost money in seven and eight months respectively. However, while Schroder UK Absolute Target lost 4.38 per cent in 2014, Newton Real Return actually gained 3 per cent.
The worst performing IA Targeted Absolute Return fund last year was another Schroder offering though: namely FE Alpha Managers Paul Marriage and John Warren’s Absolute UK Dynamic fund, which fell more than 8 per cent in 2014.
The study shows that no funds in the sector were able to make money in all 12 months of last year, but two did come very close.
One of which was Ian Heslop, Amadeo Alentorn and Mike Servent’s Old Mutual Global Equity Absolute Return fund, which FE Trustnet recently showed is now the second most popular absolute return fund with multi-managers behind Standard Life GARS.
The $2.8bn fund made money in 11 months last year – the exception being June when it lost 1.6 per cent – and also ended 2014 with an 8.71 per cent gain.
Performance of fund versus sector in 2014
Source: FE Analytics
The other fund to have only lost money in one month last year was Premier ConBrio Managed Multi-Asset General. The £15m fund, which has four FE Crowns, made 5 per cent last year.
One interesting takeaway from the study is that funds within the IA Sterling Strategic Bond sector were far better at protecting capital than portfolios in the absolute return sector.
Our data shows only one fund – M&G UK Inflation Linked Corporate Bond – lost money in seven or more months last year and the second worst monthly performer was Pimco GIS Diversified Income Duration Hedged, which made money in six out of 12 months.
On top of that, those were the only two funds in the 75-strong strategic bond sector to lose money in 2014 as a whole, while 17 funds in the 72-strong IA Targeted Absolute Return sector, or 23.6 per cent, failed to make money last year.
The IA Sterling Strategic Bond sector is also home to two portfolios which made money in every month of 2014 – GAM Star Credit Opportunities and Sanlam SPI Strategic Investment Grade Bond.
FE Alpha Manager Anthony Smouha’s five crown-rated GAM Star Credit Opportunities made 11.87 per cent last year, adding to its impressive track record since launch in July 2011.
According to FE Analytics, the nimble £150m fund has been the best performing portfolio in the sector over that time with returns of 51.16 per cent, more than doubling the sector’s gains in the process.
Performance of fund versus sector since Jul 2011
Source: FE Analytics
It also has had the most number of positive monthly periods in the sector over the period and has been the best performing portfolio in terms of its risk-adjusted returns, as measured by its Sharpe ratio.
It has become increasingly popular with fund buyers recently, with the likes of The Share Centre’s Andy Parsons and SG’s Neil Shillito tipping it as an alternative to some of the larger funds in that space. In an article last year, Parsons said he liked the fund due to Smouha’s approach to the bond market.
“They look at investment grade issuers, but will invest lower down the capital structure. They think that if you have a top quality issuer, you should be happy to hold their lower-rated debt and this has helped them to generate an extra level of income,” Parsons (pictured) said.
Excluding GAM Star Credit Opportunities and Sanlam SPI Strategic Investment Grade Bond, there were only 37 funds in the whole IA universe to make money in every calendar month last year. Our data shows 17 of those were funds from the IA Money Market and IA Short Term Money Market sectors and money market funds which sit in the IA Unclassified sector.
However, the study reiterated just how good 2014 was for investors in UK commercial property as money has poured back into the sector in the yield for income and as investors look for alternatives to bonds, along with the fact that the economy has been improving.
Twenty of those 39 funds to make money in every month last year focus on UK real estate and they include Henderson UK Property, M&G Property Portfolio, Hermes Property and the highly sort-after TIME Investments Freehold Income fund – which invests in residential property and has the best risk-adjusted returns out of any fund in the IA universe over 10 years.
Performance of fund versus indices over 10yrs
Source: FE Analytics
The best performing fund out of those 20 property portfolios in 2014 was the £1.7bn Schroder UK Property fund, which ended 2014 with an 18.94 per cent return.
