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Should investors keep faith in GARS and its absolute return ilk?

17 February 2020

Trustnet looks at the Aberdeen Standard Investments’ Global Absolute Return Strategies and its nearest rivals to find out whether investors should stick by them through underperformance.

By Eve Maddock-Jones,

Reporter, Trustnet

Absolute return strategies have taken a significant reputational hit during the broad market rally since the financial crisis, having failed to deliver the performance promised or available elsewhere.

The £4.6bn ASI Global Absolute Return Strategies (GARS) fund was launched in 2008 and went on to become one of the largest funds in the industry.

The success of the strategy inspired two rivals to launch their own similar strategies under the stewardship of former GARS managers: Invesco Global Total Return (GTR) and Aviva Investors Multi Strategy Targeted Return (AIMS).

Whilst all three are run in slightly different ways all have seen their three-year rolling returns – a key measure of performance for absolute return strategies – fall since launch.

Rolling three-year returns since August 2017


Source: FE Analytics

As the chart above shows, rolling three-year performance since August 2017 – the longest-possible period for comparison – has dropped off in recent years, including several periods where for GTR and AIMS it fell into negative territory.

Losses of any kind are especially significant for an absolute returns strategy as they strive to deliver a positive return regardless of any market conditions by making full use of the strategies and vehicles available to them, such as short-selling or derivatives.

Against a backdrop of outflows from the IA Targeted Absolute Return sector in 2019, Trustnet asked several advisers whether these funds continue to hold a place in investors’ portfolios

Darius McDermott (pictured), managing director at FundCalibre, said that he would expect the three funds to underperform against the broader equity markets due to the ongoing post-crisis bull run.

He said: “What is more disappointing is that they [the funds] are supposed to give very low correlated returns, but we've actually found that, over time, they have quite a high beta to equities.

“What has also been surprising is that, although they were all 'born' from the same team, they are supposed to do slightly different things, but they have all reacted to events in the same way, suggesting that this isn't the case.”

Admittedly, the funds have had a pickup in performance over the past year as seen below.

Rolling 3yr returns over 12 months


Source: FE Analytics

But this still isn’t enough for McDermott to convince him to put them back on the FundCalibre ‘Buy List’.

“They would need to do better - delivering uncorrelated returns over a whole cycle - for me to have faith in them again,” he explained.

“At the moment it's hard to make a case for any of them.”

Adrian Lowcock, head of personal investing at Willis Owen agreed with McDermott, that the slight rally the three strategies have seen recently is not yet enough to warrant buying the funds.

Lowcock said: “This is the issue, over five years the funds have not only lagged equity markets they have also struggled with delivering positive absolute returns and indeed managing volatility in the funds.

“Aviva for example saw a big dip in performance in November 2018. The issue is that during a period when equity markets were falling, absolute return funds also suffered losses.

“We need to see how the funds perform going forward in different market conditions and importantly whether they can protect capital if equities markets sell-off.”

The concept of an absolute return strategy is not to outperform equities, but rather to sail at a steady pace ­ not quite reaching the highs of equity markets, nor the lows should markets turn.

As such, the fact that the funds are lagging behind the equities market is no surprise, Lowcock said, as they should be more focused on capital preservation and shouldn’t have the same risk/return profiles. 

But a key issue is that the funds are not delivering the defensive element, and neither are many funds is the targeted returns sector, he explained.

“The issue here is that investors are possibly leaving the asset class no longer because of poor performance, but because they don’t want to miss out on the rally in equity markets that has been going on,” Lowcock said.

“This is usually a dangerous sign as investors give up on the protection in their portfolio just when they need it the most.

He added: “Absolute return sector hasn’t helped as it hasn’t been seen as delivering that protection very effectively in recent years, but the protection is usually most powerful in extremely volatile or down markets and if equity markets get more over-valued the protection will become more valuable.”

The bull market conditions of the past decade have not been an overly supportive for absolute return strategies, reflected in investors attitudes as the IA Targeted Absolute Returns sector was the most heavily sold off last year with outflows of £4.9bn.

And if conditions continue it could drive more investors out of the sector.

Andy Merricks, head of investments at Skerritts, said: “The problem with many funds in this sector is that all they really do, in an era of extreme low interest rates, is give you a cash return net of fees – if you’re lucky.

“The very worst thing that can happen to investors in these type of funds is to see a cash-like return, then suffer a capital loss. We all know that funds can fall as well as rise, but the way that absolute return funds tend to be set up, once you get a fall, the bounce can take many months.”

Like Lowcock and McDermott, Merricks believes that absolute returns strategies are in a tough place at the moment.

“This sector’s a really difficult one to get right and is full of over-promising, under-delivering culprits,” said Merricks. “It is also a little worrying that the sector saw such an outflow in the past year as that suggests that, on the back of a few months of equity outperformance – unexpected in many quarters – a bubble in complacency is building again.”

Merricks concluded: “Granted, it would be worrying to see [absolute return strategies] keep up with bull market gains, but avoiding the big drawdowns is essential if you’re invested in one of these.

“The big problem for any investor in absolute return funds is that you won’t know if your particular strategy works until you need it to.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.