The average IA Targeted Absolute Return fund is lagging global equities by a wide margin since the start of the year but FE Trustnet research shows that five of its members are currently ahead of the MSCI AC World with significantly lower volatility.
According to FE Analytics data, the average member of the IA Targeted Absolute Return sector has made a total return of just 2.98 per cent over 2017 to date, compared with a 9.78 per cent gain in the MSCI AC World index.
As would be expected, the average absolute return fund has given investors a far smoother ride than global equities. Our data shows the funds’ average annualised volatility for the year so far stands at 0.92 per cent, against 6.36 per cent from the index.
Performance of sector vs index over 2017
Source: FE Analytics
Of course, most absolute return funds are not expected to keep pace with global equities, especially over relatively short time frames in up markets. When they do beat equities, this often comes with significantly higher volatility than is seen in the typical absolute return offering.
The two best performing IA Targeted Absolute Return funds over 2017 have made a much higher return than the market, while hitting investors with the the extra volatility that is to be expected generating these gains.
Guy Rushton’s £232.3m Polar Capital UK Absolute Equity fund is up 31.72 per cent over the year to date with annualised volatility of 11.41 per cent. City Financial Absolute Equity, which is headed up by FE Alpha Manager David Crawford, has made 16.67 per cent with 12.41 per cent annualised volatility.
However, FE Trustnet found that five members of the 116-strong peer group have made a higher return than the MSCI AC World over 2017 while posting lower volatility numbers. Over the following pages, we take a closer look at them – keeping in mind that this is a snapshot of a short time frame and the rest of the year could play out very differently…
Man GLG Alpha Select Alternative
Performance of fund vs sector and index over 2017
Source: FE Analytics
First up – with a total return of 10.54 per cent and annualised volatility of 3.43 per cent – is Man GLG Alpha Select Alternative, which is managed by Charles Long with Nick Judge as deputy. The £157.7m fund has made a 14.2 per cent return over one year, 20.52 per cent over three and 42.88 per cent over five. The strategy behind the portfolio takes long and short positions primarily in UK equity markets or firms that derive a substantial part of their revenues from the UK. Typically, it focuses on larger companies with FTSE 100 names such as Prudential, Relx and Aviva appearing in its top 10 holdings. In terms of sectors, its biggest long exposure is to financials while the most significant short exposure is to consumer discretionary stocks. Man GLG Alpha Select Alternative has an ongoing charges figure (OCF) of 1 per cent.
GAM Star (Lux) Convertible Alpha
Performance of fund vs sector and index over 2017
Source: FE Analytics
Jonathan Stanford’s GAM Star (Lux) Convertible Alpha fund has made 10.96 per cent over 2017 so far, posting annualised volatility of 5.05 per cent. As its name suggests, the €122.8m portfolio is built around convertible bonds and in structures that replicate the payoff of a convertible bond; it offers global exposure but with “a strong focus” on Europe. The biggest holdings in the portfolio at present are convertible bonds issued by Spanish construction company Sacyr, French video game publisher Ubisoft Entertainment and container port and supply chain operator DP World. The fund is up 6.41 per cent over one year, 8.19 per cent over three years and 20.83 per cent over five years. GAM Star (Lux) Convertible Alpha has a 1.38 per cent OCF.
Schroder UK Dynamic Absolute Return
Performance of fund vs sector and index over 2017
Source: FE Analytics
Schroder UK Dynamic Absolute Return is headed by the FE Alpha Manager duo of Paul Marriage and John Warren; it has made an 11.37 per cent return in 2017 to date. Its annualised volatility of 3.38 per cent is the lowest of the five IA Targeted Absolute Return funds looked at in this article. It’s another that focuses on UK companies, investing at least 80 per cent of its assets in stocks listed on the FTSE All Share or the Alternative Investment Market. Furthermore, at least half of the portfolio will consist of small- and medium-sized companies. The largest holdings are budget holiday firm On The Beach, photonics technology business Gooch & Housego and debt purchaser and manager Arrow Global. The £298.8m fund has made 18.77 per cent over one year, 24.14 per cent over three and 49.29 per cent over five. Schroder UK Dynamic Absolute Return has a 1.19 per cent OCF.
Schroder ISF Emerging Markets Debt Absolute Return
Performance of fund vs sector and index over 2017
Source: FE Analytics
Abdallah Guezour’s $4.5bn Schroder ISF Emerging Markets Debt Absolute Return fund has made 13.47 per cent over the year so far and its annualised volatility has been 5.74 per cent (the highest of the five funds in this article). Over one year, the fund has made just 0.87 per cent while its up 2.50 per cent on a three-year view and 10.77 per cent over five years. It aims to generate positive return over 12-month periods in all market conditions and has least two-thirds of its portfolio in bonds, currencies and money market instruments from emerging markets. Mexico is the fund’s largest geographic exposure at 10.6 per cent, followed by South Africa, India, Russia and Poland. Schroder ISF Emerging Markets Debt Absolute Return has an OCF of 1.06 per cent and is yielding 2.79 per cent.
Old Mutual UK Specialist Equity
Performance of fund vs sector and index over 2017
Source: FE Analytics
The fund making the highest 2017 return on this list (and the third highest from the IA Targeted Absolute Return sector overall) is Old Mutual UK Specialist Equity, which is up 15.46 per cent. As the chart above shows, much of the outperformance has come over the past few weeks. Its annualised volatility year to date has been 5.21 per cent. The £498.7m fund has been managed by Tim Service since launch in April 2016 and is a long/short equity fund focused on UK mid- and small-caps. Its biggest long positions are fashion retailer Boohoo.com, business-to-business media company Ascential and software and information technology firm Micro Focus International. Commenting on current positioning, Service said: “Net exposure is essentially zero. The fund is slightly net short economically sensitive UK businesses, while neutrally exposed to international cyclical businesses. The largest positions on the long book reflect a wide range of attractive stock-specific opportunities, with a bias towards businesses with uncorrelated, structural growth opportunities.” It has made 21.96 per cent over one year. Old Mutual UK Specialist Equity has a 1.63 per cent OCF.