Almost a third of IA Targeted Absolute Return funds have made a loss over the past three years, according to research by FE Trustnet, the highest proportion of any sector.
While the past three years have been a challenging time for UK investors, very few would have found themselves in loss-making open-ended funds over this time.
From a total of 3,442 with a track record of three years or more, just 86 funds, representing 13 of the 38 sectors, have recorded a loss to 31 August 2019.
For the purposes of this article we have only considered mainstream IA sectors, leaving out the IA Specialist and IA Unclassified peer groups.
As can be seen from the table below, the worst offending sector is IA Targeted Absolute Return where 30.1 per cent of funds have recorded a loss over three years.
Source: FE Analytics
The £59bn sector is one of the largest and its funds – which cover a range of strategies and asset classes – are managed with the aim of delivering positive returns in any market condition.
Funds in the sector must state over which timeframe they aim to meet their absolute return objective, although it must not be longer than three years.
The fund that made the biggest loss over the period under scrutiny is LF Odey Absolute Return, which is down by 13.13 per cent.
The £573.1m global equity, long/short strategy fund is overseen by James Hanbury, Adrian Courtenay and James Grimston. It targets a positive absolute return on a 12-month rolling basis, independent of market conditions.
It is not alone in making a double-digit loss, however, and is joined by TM Sanditon UK Select (down 13.02 per cent), Mansard Principal Asset Allocation (12.07 per cent) and BMO Global Equity Market Neutral V10 (10.39 per cent).
While it may have the highest proportion of loss-making funds, the IA Targeted Absolute Return sector is not home to the worst-performing fund. That distinction belongs to the IA UK All Companies sector.
The worst performing fund in the period under review is one that will be familiar to many UK investors, having dominated headlines in the past few months: LF Woodford Equity Income.
The gated UK equity income flagship fund of former star manager Neil Woodford has made a loss of 33.87 per cent over the three years to the end of August.
The fund was closed to new investment and redemptions after poor performance and liquidity concerns led to outflows. Manager Woodford is in the process of offloading positions to meet the redemptions.
Performance of fund vs sector over 3yrs
Source: FE Analytics
In total, 5.28 per cent of funds in the IA UK All Companies sector have made a loss over the three-year period.
Other funds in the sector that have made a significant loss include L&G UK Alpha Trust (down by 19.17 per cent) and Invesco UK Strategic Income, overseen by Mark Barnett (down 12.92 per cent).
Moving on, it is worth highlighting the IA Short Term Money Market sector for two reasons.
Firstly, the one loss-making fund – Scottish Widows Cash – has an outsize effect on the seven-strong sector, explaining its high ranking in the table above.
Secondly, while the £86.7m fund’s 0.17 per cent loss is small, it is in a sector that many regard as low-risk, investing in short-term gilts and Treasuries as well as money market instruments.
There were several other sectors with just one loss-making fund, including: IA Mixed Investment 0-35% Shares, (Optimal Multi Asset Defensive), IA UK Property Other (HC Charteris Property), IA Global Bonds (T. Rowe Price Dynamic Global Bond) and IA UK Equity Income (ASI UK Income Unconstrained Equity).
While IA UK All Companies features high up the list and is home to the worst-performing fund, the IA UK Smaller Companies sector has a greater proportion of loss-making funds with 6.25 per cent, albeit made up of three funds from a smaller number of strategies with a three-year track record.
The worst performer among the UK small-cap strategies is the £11.7m MI Downing UK Micro-Cap Growth fund, a concentrated portfolio of stocks with a market capitalisation of between £20m and £250m, overseen by Judith MacKenzie. The fund is down by 9.66 per cent over the three years to 31 August.
At the foot of the table is IA Global. Just 0.35 per cent of the sector’s 283 funds with a long-enough track record have experienced a loss over the past three years.
However, each of the three funds are specialist equity strategies focused on one sector: energy.
Performance of funds over three years
Source: FE Analytics
As the above chart shows, the worst performer is the $319.3m Schroder ISF Global Energy fund – a concentrated equity strategy, managed by Mark Lacey, which focuses on exploration and production companies in the oil & gas sectors. It made a loss of 23.13 per cent.
It is closely followed by the $8.1m MFS Meridian Global Energy fund, which is down by 20.43 per cent.