Quilter Cheviot has paired well-known absolute return funds such as Invesco Perpetual Global Targeted Returns with more off-the-radar offerings to add greater diversification to its portfolios. 
Nick Wood, head of investment fund research at Quilter Cheviot, noted that alternative assets are an important element of the firm’s portfolios as they offer a source of returns that are uncorrelated to bonds and equities.
Within this bucket, the company has allocations to property funds and physical gold as well as absolute return funds, despite these strategies attracting a fair degree of criticism.
“It’s been a very difficult area – when equities are doing very well, the standard criticism of absolute return funds is that they give you absolutely nothing,” Wood said.
“In a relative sense, they don’t look great in a portfolio but the key point for us is what they are there to do: provide diversification and protection in more volatile times. We’ve seen that happen over the year-to-date as they’ve done what we’ve expected.
“Absolute return is an increasing part of everyone’s portfolios and we’re invested in a number of holdings, with each intended to offer a different type of exposure to more standard equity and fixed income buckets.”
Here, we take a closer look at three of the absolute return funds that the discretionary investment management firm is making us of across its portfolios.
Invesco Perpetual Global Targeted Returns
First up is the £12.4bn Invesco Perpetual Global Targeted Returns fund, which has been managed by David Millar, David Jubb and Richard Batty since inception in 2013. Before joining Invesco Perpetual, the managers were at Standard Life Investments, where they worked on its popular Global Absolute Return Strategies (GARS) fund.
Performance of fund vs sector since launch
Source: FE Analytics
Invesco Perpetual Global Targeted Returns is based around 20-30 ‘ideas’ taken from across the investment universe. Current ‘ideas’ being expressed in the portfolio include Commodity – Short, Currency – Japanese Yen vs Korean Won and Equity – European Divergence.
“This is a very well-known and well-held fund. It was launched by some of the ex-GARS team and looks to provide Libor plus 5 per cent over the long term,” Woods said.
“There is a proven and experienced team who have been able to put together portfolios that are highly risk-focused but still have the ability to provide a positive total return. The fund has been very successful so is gathering assets at quite a rate, so we are very conscious of that and think about it on a regular basis but are comfortable with the fund today.”
Since launch in September 2013, the fund has posted a 19.41 per cent total return compared with a 12.28 per cent gain from its average IA Targeted Absolute Return peer. Over this time frame, it has shown a 0.22 correlation with the MSCI AC World and a 0.14 correlation with the Bloomberg Barclays Global Treasury index.
Invesco Perpetual Global Targeted Returns has an ongoing charges figure (OCF) of 0.87 per cent.
LFIS Vision UCITS Premia
One of the more specialist alternatives funds found in Quilter Cheviot’s portfolios is LFIS Vision UCITS Premia, which resides in the offshore universe.
Performance of fund vs sector since launch
Source: FE Analytics
The Luxembourg-domiciled fund offers exposure to three ‘families’ of risk premia: academic premia, which includes value, carry and momentum; implied premia, such as volatility, correlation and dividend; and carry/liquidity premia, which covers the likes of basis trades and arbitrage strategies.
Wood said: “Having a style premia fund in the mix that has exposure to a wide range of styles, such as academic premia, can be beneficial. There’s a lot of research around what factor’s work in markets and this fund takes exposure to various ‘slivers’ of those factors.
“This fund is not based around just one factor, it has multiple factors in the portfolio that gives you a more balanced approach and hopefully leads to steady return over the long term. Quite a few style premia funds have been launched in recent years and this was the one we felt had the strongest capability.”
As the chart above shows, the €1.8bn LFIS Vision UCITS Premia fund has outperformed its average peer with a 4.82 per cent total return since launch in February 2016. Its correlation to global equities over this time has been 0.47 while the correlation to global government bonds stands at 0.08.
The fund has an annual management charge of 2 per cent.
Aspect Diversified Trends
The final alternatives fund highlighted by Wood is Aspect Diversified Trends. This $7.6bn fund aims to generate “sustainable, high-quality returns” that are uncorrelated with the major asset classes through exploiting price trends.
Performance of fund vs sector since launch
Source: FE Analytics
“This is a trend-following fund, in that it looks to invest in market trends and is essentially a momentum strategy. This fund looks at trends across equity markets, bonds, interest rates, commodities and so on,” the head of investment fund research said.
“When it does well is when a particular factor doing well for an extended period time. It does struggle, however, when you have an environment where markets are moving between risk-on and risk-off over a short period of time. Trend-following funds are not exactly absolute return strategies and can give you negative returns but we see them as a source of uncorrelated alpha.”
The chart above backs up Wood’s point, as the fund’s 14.91 per cent return since launch is higher than its average peer’s but this has come with much higher annualised volatility and drawdowns.
That said, Aspect Diversified Trends’s correlation to the MSCI AC World index since launch has been just 0.07. It also has had a 0.13 correlation to the Bloomberg Barclays Global Treasury index.