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Three absolute returns fund that live up to their billing

09 March 2020

Darius McDermott, managing director at FundCalibre, highlights three absolute return strategies that might change investors’ perceptions of the sector.

By Darius McDermott,

Chelsea Financial Services

The IA Targeted Absolute Return sector has had quite the fall from grace in the past couple of years, as investors lost faith in its constituents’ ability to do what they said they would.

Having been the most popular sector choice for investors in both 2015 and 2016, according to Investment Association data, and having quickly ballooned in size, the perception of these vehicles has since been maligned by poor performance and queries about the construction of the sector they sit in. Those concerns have some merit: there are long-only, long/short, UK-centric, global, fixed interest, and numerous other types of funds all mixed together in the peer group.

The sell-off seen by the stock markets in the final quarter of 2018 was particularly hard for these funds and they’ve never really seen sentiment recover since. In 2019, the average fund in the sector returned 4.38 per cent (which in fairness is the sort of annual return you’d want from these products), yet investors shunned them in droves with the IA Targeted Absolute Return sector recording the worst net retail sales of 2019, losing net assets of almost £5.6bn.

The strange mix of funds is confusing for most when trying to evaluate the sector, and that mix has led to significant disparity in performance. In 2019 the best performer returned almost 21 per cent while the worst performer fell almost 33 per cent – a difference of more than 50 per cent.

But the shadow over the sector should not extend to all 117 of its constituents. There are some strong performers in the sector, which provide the solid, consistent returns investors crave. Here are three to consider.


TwentyFour Absolute Return Credit

Managed by Chris Bowie, the TwentyFour Absolute Return Credit fund aims to achieve a positive absolute return in any market environment, with a modest level of volatility, over a period of three years to 25 February.

Crucially, this fund has been designed to be easy to understand and does not 'short' stocks or borrow any money to boost returns. Risk control and capital preservation is at the heart of fund. One of its central objectives is to keep volatility very low (less than 3 per cent). This is achieved by tightly managing the fund's interest rate and credit risk.

The fund is unconstrained by geography and will look across the UK, US and Europe for the best ideas, although all positions will be hedged back to sterling to remove currency risk. It has delivered predictable, positive returns, with low volatility and low drawdowns, returning 8 per cent in the past three years.

Brooks MacDonald Defensive Capital

This fund holds things like convertible bonds, preference shares, structured notes, bond and loan assets, and discounted assets – but it has a simple goal of delivering a positive return in all market conditions.

The fund has been more volatile than its competitors in this space, but its annual returns are also typically well above the sector average. Manager Niall O’Connor uses the range of tools available to him to dial-up or dial-down the fund’s sensitivity to market movements, which results in an intelligent investment mix that should see investors through a range of market conditions.

The manager seeks to create a portfolio with ‘predictable’ performance by investing in assets that have fixed returns. He is careful not to overpay and will always try to buy assets when they are trading below their intrinsic value.

To reduce the risk of assets failing to meet expectations, the fund typically has between 80 and 110 holdings and its underlying exposure is further diversified across different regions and sectors. The fund has outperformed the sector on a rolling basis in each of the last five years.

SVS Church House Tenax Absolute Return Strategies

A boutique fund run by two very experienced managers, James Mahon and Jerry Wharton, this is an extremely useful portfolio diversifier. Church House Tenax Absolute Return Strategies fund is one of the few in the sector that targets an absolute return from diversification and risk management alone.

It targets positive returns over rolling 12-month periods and Libor plus 4 per cent over rolling three-year periods. The managers look for low correlation of returns between assets where possible, and low volatility in the fund’s overall exposure.

James and Jerry’s top-down macro view is derived from macro-economic data, corporate activity, political risk and the interest rate/inflation outlook, and they establish their view on credit and stock markets within this economic framework. The managers then seek to gain the appropriate exposure across a broad range of asset classes.

By building a portfolio from fundamentals, James and Jerry can assess the absolute return characteristics of each investment and how that affects the portfolio in terms of its’ overall volatility. The fund has returned 3.36 per cent in the past three years to 25 February.


Darius McDermott is managing director at FundCalibre. The views expressed above are his own and should not be taken as investment advice.

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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.