Views on absolute offshore not absolute

Absolute returns, traditionally the domain of hedge funds, are being targeted at retail investors across Europe via a raft of long only absolute return fund launches.

One such launch came from Scottish Widows Investment Partnership (SWIP) in June this year with its Luxembourg Sicav. The range mirrors a number of its onshore offerings, and three of the funds are absolute return funds. This is an area where SWIP believes there is significant client demand in the markets it is aiming at: Germany, France, Italy, Spain, Sweden, Switzerland and the Netherlands.

Simon Wombwell, head of distribution at SWIP, says: “We have added absolute return funds to the package in order to offer clients the chance for positive returns in falling markets and at a time when institutional clients across Europe are taking a much closer look at risk and return.”

This is not a completely new phenomenon – Schroders has been running offshore absolute return funds for almost 10 years – however to date these funds have been mainly aimed at institutional investors. Interestingly, given the recent difficulties faced in fixed income markets, no funds in the sector met their investment objectives in the year to 1 March 2007, according to Standard & Poor’s; indeed most failed to outperform cash. This may prove to be something of a headwind for companies targeting these products at the retail space.

Absolute return funds is an area that Chelsea Financial Services is currently investigating. Juliet Schooling, head of research, says: “It’s a relatively new concept and funds are all slightly different. You need to know where it’s investing and whether it fits with your portfolio.” The SWIP Absolute Return Macro fund is fairly unique, says Schooling. “It’s got a little bit of everything.” Managed by Ken Adams, the fund invests in equities, bonds, currency and property and is benchmarked against 3-month Euro Interbank Offered Rate (EURIBOR). It has an annual target return of EURIBOR plus 3%. Schooling notes that performance of the onshore version, which launched in May 2006, has been weak.

“I would say it’s going to be quite a defensive fund.”

SWIP’s other two Luxembourg offerings, the Euro and US Dollar Absolute Return funds, managed by Craig Inches, invest in short-term bonds in order to provide a stable income base, and in futures on bond indices, exchange traded funds and currency forwards. Both have an annual target return of cash plus 2%.

Tom Caddick, fund manager on F&C’s multi-manager team, has looked at a few absolute return funds, although he currently does not hold any. “There is nothing to say we wouldn’t. I’m not sure the area will be as large as some people think, but it will probably form another asset class. It will have a place, but probably not as a replacement for equities.” He adds that if one is aiming to beat cash with a product that is more volatile, one needs to be looking to beat it significantly.

Jason Butler, partner of Bloomsbury Financial Planning, is not an advocate of absolute return funds but does see the benefits of offshore-domiciled funds. “The benefit of non-domiciled funds is the taxation issue. It’s useful for people who are non UK domiciled but UK resident – you don’t have to pay withholding tax on capital gains. It’s one of the anomalies on tax which favour non-domiciled funds.”

1 August 2007