The last three years have played host to tumultuous market conditions to say the least, from 2013’s rally, a generally flat performance in 2014 and periods of heightened stress last year and at the start of 2016.
This has resulted in uncertainty among many investors in terms of where to put their cash, with the FTSE All Share suffering a maximum drawdown of 15.8 per cent over three years while UK gilts and global bonds have seen drawdowns of 6.62 and 6.68 per cent respectively following 2013’s ‘taper tantrum’.
To ride out this volatility and to minimise risk in their portfolios, more and more investors have been hunting out buying opportunities in the IA Targeted Absolute Return sector.
In fact, according to data from the Investment Association, it was the top-selling sector in February with net retail sales of £243m, pipping the second-top-performing UK Equity Income sector to the post by £29m.
It must be noted that absolute return area is a mixed bag with funds offering a wide variety of asset class exposure and having different time frames, although generally speaking, investors will turn to the sector to positon their portfolio more defensively.
In such choppy market conditions, which of these funds really have managed to protect investors? FE Trustnet takes a look at which of these investment vehicles have continuously managed to deliver positive returns on a weekly basis over the last three years (while a week is a short period of time, investors are likely to check their portfolios more regularly during times of volatility to see how their funds are faring).
Table of funds with most positive weekly periods over 3yrs
Source: FE Analytics
First on the list with 104 positive weekly periods over the last three years is Kames Absolute Return Bond, which is headed up by Colin Finlayson and Stephen Snowden.
The four crown-rated fund aims to generate a positive return over rolling three-year periods and is able to hold debt instruments from AAA government bonds to high yield and emerging market bonds, all of which can be held in any currency.
Over the last three years, the £1.8bn fund has provided a total return of 3.88 per cent, outperforming its LIBOR GBP 3 Months Total Return benchmark by 2.22 percentage points. While the FTSE All Share returned 10.17 per cent over the same time frame, it did so with only 83 positive weekly periods, 21 times the amount of annualised volatility and a maximum drawdown that is 21 times greater than that of Kames’, which stands at just 0.75 per cent.
Performance of fund vs benchmark and index over 3yrs
Source: FE Analytics
Kames Absolute Return Bond, which has a clean ongoing charges figure (OCF) of 0.69 per cent, isn’t the start of a trend when it comes to bond funds in the sector delivering the highest number of positive performance periods over the last three years though.
The four funds with the highest number of negative periods over the same time frame are all absolute return bond funds – Aberdeen Absolute Return Bond has had only 59 positive weekly periods, BlackRock Absolute Return Bond has had 64 positive periods, LO Absolute Return Bond has had 65 and Schroder ISF Emerging Markets Debt Absolute Return has had 67.
Instead, the next absolute return fund on the list for the highest number of consistent positive weekly returns is a long/short equity fund. Henderson UK Absolute Return is run by FE Alpha Manager duo Ben Wallace and Luke Newman and aims to deliver positive absolute returns each year through both long equity positions and derivatives.
The five crown-rated fund uses CFD derivative contracts – which allow you to trade on live market price movements without owning the asset - to bet whether a stock will go up or down. Between 50 and 60 per cent of the portfolio is held in positions that the managers think will rise or fall by 20 per cent over at least a year, while the rest of the holdings are more tactical, short-term positions.
Since the fund launched, it has provided a positive total return over one, three and five years. It has also delivered a positive total return each full year since it launched in 2009 on an annualised basis with the exception of 2011 when it lost 126 basis points.
Performance of fund vs index since launch
Source: FE Analytics
While the FE Research team warns that the fund has a higher correlation to the equity market than most global macro absolute return funds, it says that it could be a good option for investors that still want to invest while limiting risk due to its ability to short stocks.
“The managers have run this strategy for over a decade for different fund houses and have an impressive track record over that time,” it explained.
“They are starting to slow inflows from new investors in order to be able to grow the fund through performance for longer. We support this decision as it should allow current investors to continue to benefit from the strategy.”
Henderson UK Absolute Return, which has a maximum drawdown of 2.84 per cent and an annualised volatility of 3.98 per cent, has a clean OCF of 1.06 per cent.
The last three years seem to have been a good time to buy into long/short equity funds in general, as more than half of the top 10 funds with the highest number of positive weekly periods over three years fall into this category – these include Argonaut Absolute Return, City Financial Absolute Equity and Old Mutual Global Equity Absolute Return.
However, the fund that is third on the list for its positive weekly returns is Premier Defensive Growth, which invests in global equities, property, bonds, alternative assets and private equity.
It is headed up by Paul Smith, who is head of fixed income at Premier. The fund aims to generate more than cash on a 12 month rolling basis and the manager does this through buying into assets which have a fixed life and a fixed return.
On an annualised basis, the fund has outperformed its LIBOR GBP 3 Months Total Return benchmark since its launch, with the exception of 2011 when it provided a return of 0.52 per cent compared to its benchmark’s return of 0.87 per cent.
Overall though, it has outperformed by 15 percentage points with a total return of 18.54 per cent. While this is 12.43 percentage points less than the FTSE All Share, it has provided almost an eighth of the annualised volatility and a maximum drawdown which is eight times less than the index’s over five years.
Performance of fund vs benchmark and index since launch
Source: FE Analytics
Premier Defensive Growth has a clean OCF of 1.11 per cent.
