Absolute return funds, which promise to achieve positive net returns and low volatility in all market milieus, have spectacularly failed to this year.
The Investment Association (IA) targeted absolute return sector has been the most popular with UK investors so far this year, registering net retail sales of almost £4 billion (€4.97 billion) between January and September according to IA data, due to concerns over major global headwinds such as Brexit and today’s US Presidential election. It now stands as the biggest fund sector in the UK, with assets of £68 billion under management.
However, FE Trustnet data indicates many of these funds have performed woefully over the period; vehicles in the sector have returned an average of 1.2%. By comparison, the FTSE All Share index has risen 12.5%.
Standard Life Investments’ Global Absolute Return Strategies fund, the largest fund in the sector, has lost investors 4%. Argonaut Capital’s Absolute Return fund has performed the worst, losing 20.5%.
“Currency exposure has had a huge impact this year, more so than returns in underlying asset classes and markets – some of the worst returning AR funds are those that have a standard practice of hedging overseas currency exposure back into sterling in share classes available to UK investors,” Jason Hollands, managing director at Tilney Bestinvest, told Funds Europe.
However, Ryan Hughes, head of fund selection at AJ Bell, suggested there might be other factors at work too.
“The sector has seen rapid inflows which has made it difficult for some managers to effectively implement their strategies – equity markets have moved higher in a persistent trend which hasn’t given rise to relative value trading opportunities. With the persistent strength of quality over value, many have been hoping for mean reversion which hasn’t happened,” he said.
“In addition, very few were positioned properly for Brexit which meant their tail hedges didn’t offset initial losses and there has also been a consensus that US interest rates were going to rise this year and government bonds yields couldn’t go lower. However, most have been wrong and therefore short positions in government bonds have been very painful.”
Conversely, some absolute return vehicles have performed positively this year. Hollands notes the Invesco Perpetual Global Targeted Return fund is up 3.4%, despite a backdrop of negligible interest rates and bond yields.
“The Newton Real Return has returned 8.2% over 12 months, buoyed by its gold exposure – Jupiter Absolute Return has also done rather well, returning 12% over 12-months,” he said.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said it’s hard to generalise with absolute return funds.
“There is such diversity in the sector – despite the absolute return tag investors do need to be willing to sustain some losses in the short term, the test of an absolute return fund is how deep those losses are, and how long they persist for,” he said.
“The sector is however rife with performance fees, and I urge investors to inspect these to make sure they are not set up on a heads I win, tails you lose basis.”
Due to the diversity of the sector, Khalaf says investors shouldn’t write off the sector completely. For instance, BNY Mellon’s Absolute Return Bond fund has returned 23.5% over 2016 to date, and Invesco’s Perpetual Global Targeted Returns fund 3.4%.
“Investors should be less concerned about fund labels, and spend more time focusing on how funds go about sheltering investors from market downturns, and how successful it has been at doing so in the past,” he added.
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