Nearly one in three absolute return funds failed to deliver a positive return to investors last year, according to research by FE Trustnet, while only half kept up with the FTSE All Share.
However, cumulative three-year numbers for members of the IA Targeted Return sector are better with almost nine out of 10 absolute return funds delivering a positive return to investors.
The past three calendar years make for a period where these types of portfolios should come into their own. The period delivered markedly different conditions for investors with 2013 seeing a strong rally in risk assets, 2014 being broadly flat and 2015 even flatter – albeit with some significant market falls.
In 2013 the FTSE All Share rallied 20.81 per cent, in 2014 it gained 1.18 per cent and in 2015 0.98 per cent. These past two years' low returns belie a substantial ramp up in volatility with both containing several sharp periods of downside.
Performance of index over 3yrs
Source: FE Analytics
Many of the funds that lost money last year invest in a specific asset class – particularly fixed income – or a specific area of the bond market, such as emerging market debt in the case of the Schroder ISF Emerging Markets Debt Absolute Return, Schroder ISF Asian Bond Absolute Return and Absolute Insight Emerging Market Debt.
The former is the worst performer overall both in 2015 and over a three-year period, down 6.47 per cent and 8.7 per cent respectively.
Over three years these are also the portfolios that have lost money alongside the likes of Threadneedle Credit Opportunities, Aberdeen Absolute Return Bond and Threadneedle Absolute Return Bond funds.
Source: FE Analytics
This highlights the problem with analysing the sector as a whole as it is very mixed bag.
However, many of the broader mandated funds such as Marlborough Defensive, Insight Global Absolute Return, BlackRock Dynamic Return Strategy and Thesis TM Cartesian UK Absolute Alpha were among those losing money last year. Although, these are mainly all more defensively positioned.
Perhaps unsurprisingly, the two products that have been attracting the most cash over the past year are the £26.7bn Standard Life Investments Global Absolute Return Strategies – GARS - and £4.2bn Invesco Perpetual Global Targeted Returns funds, receiving inflows of £3.6bn and £2.6bn respectively.
Both are run along similar lines with the latter formed by the defection of some of the senior team from GARS.
Over the past year GARS has returned more than Invesco Perpetual Global Targeted Returns while both have delivered a third of the volatility of UK equities.
Performance of funds and index over 1yr
Source: FE Analytics
Charles Stanley Direct’s Rob Morgan is a fan of using absolute return funds for uncertain markets such as 2015 and, he says, the year to come.
He prefers the £970m Henderson UK Absolute Return fund, managed by FE Alpha Managers Ben Wallace and Luke Newman.
“The managers have shown an aptitude for making money in many types of markets and protecting capital when it matters.”
Looking at risk-adjusted returns in the graph below (where the x-axis shows volatility and the y-axis shows returns), we can see the relationship over three years with Wallace and Newman’s portfolio as well as the Henderson European Absolute Return fund doing particularly well.
Performance of risk adjusted returns over 3yrs
Source: FE Analytics
At the other end of the spectrum, the list of best performing funds are dominated by portfolios that have been willing to take on more risk: namely the City Financial Absolute Equity, FP Argonaut Absolute and CF Odey Absolute Return funds, which returned 21.86 per cent, 10.24 per cent and 7.98 per cent in 2015, respectively.
They all tend to have a higher beta than the ‘average’ portfolio in the sector and are all are long/short funds that have had mainly long books in recent years. For example the £1bn CF Odey Absolute Return, run by James Hanbury and Jamie Grimston, has been near 100 per cent long over the past year.
One fan of the now soft-closed portfolio is co-head of the F&C MM range Rob Burdett, who said the fund is his favourite of the past year.
“Yet again the fund has delivered decent returns in an especially tricky market for absolute return funds. But we see the fund as a stock-picking fund that has been designed by the managers to suit their skills, rather than a traditional absolute return fund,” he said recently.
Of course the purpose of an absolute return fund is to make an absolute return but many use the portfolios to dampen overall portfolios volatility and every fund in the sector was less volatile than the FTSE All Share in 2015 – while only Hugh Hendry’s CF Eclectica Absolute Macro fund has a greater maximum drawdown.
In 2014 this was also the case although the fund was joined by CF Odey Absolute Return and City Financial Absolute Equity as being more volatile than the index.
In this year these funds – as well as FE Alpha Managers Paul Marriage and John Warren’s Schroder Absolute UK Dynamic, Natixis H2O MultiReturns, JPM Global Macro Opportunities and FP Argonaut Absolute Return funds – had a bigger maximum drawdowns than the FTSE All Share.
In 2013 all funds in the sector had lower volatility and lower maximum drawdown than equities.
