Just four absolute return funds have delivered consistent positive rolling 12-month returns over the past three years, according to research by FE Trustnet.
The IA Targeted Absolute Return sector is the fourth largest in the Investment Association universe with total funds under management of £65.5bn spread across 125 different strategies.
However, the sector's members have faced increasing criticism by investors for often failing to live up to their description as “absolute return” funds.
In what was, admittedly, a tough year for markets just 17 out of the 115 funds with a long enough track record made a positive return in 2018. Conversely, in a 2017 devoid of significant volatility 93 out of 111 strategies made a positive return.
Yet, it must be noted that the sector is home to many different strategies covering a diverse range of geographies and asset classes while being benchmarked against a broad range of performance benchmarks.
As such, it can often be difficult to compare the sector’s members with each other.
Funds in the sector are broadly defined by the Investment Association (IA) trade body as those with the aim of delivering positive returns in any market conditions, although returns are not guaranteed.
Under its classifications the IA stipulates that funds must aim to meet their objectives over a period not longer than three years.
However, the trade body notes that there is an expectation among consumers and advisers that the funds will aim to produce positive returns over 12-month periods.
Rolling 12-month returns of sector over 3yrs
Source: FE Analytics
As such, the IA provides data to show how many times a fund has failed to deliver returns greater than zero over rolling 12-month periods over a period of 36 months.
Using FE Analytics, we found just four funds with a long-enough track record scored a maximum 24 positive data points from 24 rolling 12-month periods over the past three years to end of April.
Below, FE Trustnet takes a closer look at the four absolute return strategies.
Artemis US Absolute Return
First on our list of funds delivering a return above zero over each of the 24 data points is the five FE Crown-rated Artemis US Absolute Return fund, managed by Stephen Moore.
The US equities fund targets a long-term positive return regardless of market conditions and, like most of the funds in this study, is a long/short equity strategy.
FE Alpha Manager Moore has been in charge of the fund since launch in October 2014, having run a similar vehicle at Columbia Threadneedle. Over three years, Artemis US Absolute Return has made a total return of 7.51 per cent.
Analysts at FE Invest include the £492.1m fund on its Approved List and noted that while most of its gains have been made from the long positions given the strong rise in markets in recent years, short positions have helped mitigate losses when the market has sold off, most recently in the latter half of 2018.
“We expect the fund to stay lowly correlated to US equity markets due to its construction,” they noted. “The capacity to have negative views on stocks mean that the fund performance does not depend on the directionality of the market.”
Artemis US Absolute Return has an ongoing charges figure (OCF) of 0.87 per cent. However, it also carries a 20 per cent performance charge in excess of the Libor three-month index. In its last financial year this was 0.66 per cent.
Rolling 12-month returns of funds over 3yrs
Source: FE Analytics
BlackRock Global Long Short Equity
The next fund is the £7.4m BlackRock Global Long Short Equity fund; it has been managed by Kevin Franklin since launch in October 2015.
BlackRock Global Long Short Equity has a diversified approach to investing with more than 670 holdings as at the end of March and no single position representing more than 2 per cent of the portfolio.
The three FE Crown-rated fund targets a positive absolute return on a 12-month basis and has returned 14.16 per cent over three years.
Since launch in October 2015, BlackRock Global Long Short Equity has returned 8.19 per cent. It has an OCF of 1.36 per cent.
Man GLG Alpha Select Alternative
The £806.7m Man GLG Alpha Select Alternative fund is next up and aims to deliver rolling 12-month absolute returns by investing in UK large-cap stocks.
Overseen by managers Charles Long and Nick Judge, the fund takes a market neutral approach to deliver consistent alpha. To achieve this Long and Judge employ a fundamentals-based stockpicking with a top-down thematic overlay.
The managers seek out divergences between a company’s true value and the market’s perception of its value to outperform the market. The portfolio is roughly equally split between long and short positions.
Man GLG Alpha Select Alternative has made a total return of 24.87 per cent over three years. It has an OCF of 1 per cent and also carries a performance fee of 20 per cent outperformance of the LIBOR, charging 1.15 per cent last year.
Rolling 12-month returns of funds over 3yrs
Source: FE Analytics
VT Woodhill UK Equity Strategic
The final fund on our list is VT Woodhill UK Equity Strategic and, unlike the other funds in this study, is a long-only strategy that focuses on large-cap UK equities.
The fund’s manager Paul Wood – who is co-founder and chief investment officer of Woodhill Asset Management – invests in a concentrated portfolio of 50-60 names typically with strong fundamental characteristics such as low gearing and earnings growth.
The manager also hedges the full value of the equity portfolio with UK market index futures, which is used tactically depending on market risk to protect investors from any potential downside.
Writing in March, the manager noted that similarities in global equity markets to previous downturns in 2000 and 2008 were “quite remarkable”, highlighting relatively expensive valuations from a cyclically-adjusted price-to-earnings (CAPE) multiple perspective.
This, he said, was particularly dangerous when coupled with the recent inversion of government bond yield curves
Over three years VT Woodhill UK Equity Strategic has made 9.12 per cent. The fund has an OCF of 1.18 per cent.