Investors have just three weeks to make use of their ISA allowances, ramped up to £15k since this time last year. While new rules allow for the total allowance to be utilised as cash for the first time, those with capital protection in mind may wish to consider absolute return funds which aim to make a stated return above cash over a certain period or target low volatility.
In the IA Targeted Absolute Return sector one fund has benefitted from overwhelming popularity in recent years: Standard Life Investments Global Absolute Return Strategies, or ‘GARS’.
GARS makes an ideal holding for those looking to further diversify their portfolio away from more core holdings such as bonds or equity income, according to Ben Willis, head of research at Whitechurch Securities.
“It has a very broad number of strategies and a very good track record,” Willis said, who thinks it can continue to do what it aims to: beat cash with lower equity volatility regardless of market conditions.
Despite a hard time for absolute return funds in 2014, the £24.1bn Standard Life GARS fund was one of only a few to receive more than £1bn of inflows during the year. In fact it received almost £2bn.
More generally, absolute return funds have seen their popularity shoot up in recent years. That trend seems to show no signs of abating, with GARS seeing an additional increase in assets of a £1bn in 2015 so far. While a small amount of this will be due to a growth in the value of underlying assets, undoubtedly much of this is down to inflows.
The fund has stood up to the year’s volatility and beat the FTSE All Share as well as giving investors a smoother ride. It made 9.02 per cent, while the IA Targeted Absolute Return sector average was 3.47 per cent and the FTSE All Share gained 6.62 per cent with almost three times the volatility of GARS.
Performance of fund, sector and index over 1yr
Source: FE Analytics
Since it was launched in 2008, GARS has also beaten the FTSE All Share for total return but with an even better showing on volatility terms – the All Share has been more than four times as volatile over this time.
Performance of fund, sector and index since 2008
Source: FE Analytics
Willis also backs a relative newcomer to the sector, the £456m Invesco Perpetual Global Targeted Returns fund. He says has similar manner to the GARS – which is unsurprising given it was launched by the team behind much of GARS’ success – but should perform differently over time.
“I hold both of them together. While they have some similar processes and the Invesco Perpetual fund still owns the original GARS intellectual property, they are likely to perform differently over time and so can help with diversification.”
Tilney Bestinvest’s Jason Holland’s also backs absolute return funds for ISA holdings this season, particularly GARS and the Invesco Perpetual Global Targeted Returns fund. But he adds the £300m Threadneedle UK Absolute Alpha fund to his list.
“At a time when more and more of the public are being drawn in to the higher rates of tax and when the election could herald the return of a top rate of 50 per cent income tax, it really does make sense to utilise important tax-efficient allowances such as ISAs and pensions while you can,” Hollands said recently.
“Investors who are nervous about investing in the markets at the moment should therefore consider either investing their ISA in absolute return funds or opening their accounts with cash now and investing later, perhaps on a regular drip feeding basis, rather than eschewing ISAs altogether.”
Threadneedle UK Absolute Alpha has been co-managed by Chris Kinder and Mark Westwood since its launch in 2010.
It achieved a five crown-rating for the first time in January 2014, which it has held onto since. It differs from most other funds in the sector as it only invests in equities, predominantly in the UK but also through the use of derivatives within the portfolio. About 20 per cent of the fund is currently in the futures market.
It aims to generate 8-10 per year over a market cycle – defined by Threadneedle as three to five-year investment period. Also, it aims to generate a return greater than zero of any 12-month period. Both of these objectives have been met since the fund’s launch in September 2010.
It has made 33 per cent since its launch while the average fund in the sector has made 16.83 per cent.
Performance of fund vs sector since Sep 2010
Source: FE Analytics