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Lure of Absolute Returns remains despite underperformance

By James Hoey

Updated on Friday, 20 October, 2017

As the name suggests, Absolute Return funds are meant to deliver positive returns in all market conditions. So, have they been meeting their objectives?

In the past year Absolute Return funds have had their fair share of negative headlines, and big-name funds in the Investment Association’s (IA) Targeted Absolute Return sector have suffered outflows – notably Standard Life Investments Global Absolute Return Strategies (GARS). Approximately £4,246.23m has flown out of the fund with the fund size dropping from £26,258.50m to £22,573.00m over the same period.

Furthermore, the Financial Conduct Authority criticised Absolute Return funds in its market study of asset management published in June this year. The regulator found problems such as poor portfolio returns, an inconsistent benchmarking approach and raised questions about the use of performance fees.[1]

We asked our research manager, Charles Younes for his thoughts: “Although the Standard Life Gars fund remains by far the largest in the IA Targeted Absolute Return sector, this seems to highlight a reduced overall appetite from investors for these Absolute Return products. Looking purely at performance it is easy to see why they may have become less desirable.

“When Standard Life reported its profits for 2016 at the start of this year the results showed a lower demand for its flagship fund. According to the figures, gross inflows fell by 40 per cent over 2016, from £17bn in 2015 to £10.2bn at the start of the year.”

 

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According to FE data, the average U.K. All Companies fund is up 70% over the last five years, while strategic bond funds are up 25%. The average Targeted Absolute Return fund meanwhile has increased by only 18%.

This shows that since the financial crisis, investors have been better off invested in a stock or bond market fund.

Despite this, Targeted Absolute Return funds remain one of the most researched funds by advisers on FE Analytics. Using FE’s unique Analytics Market Intel (MI) tool, we found that over the last three quarters, two Targeted Absolute Return funds have made it into the top 10 most researched funds (Standard Life Investment GARS and Newton Real Return occupy fourth and sixth places respectively).

Table of top 10 most researched funds January 2017 – September 2017:

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The crux of the matter is that the lure of good returns with low volatility is extremely tempting and that is probably why they continue to appear in the top 10 most researched list on a regular basis. It is the ideal investment for investors, as long as the funds are performing as they should, because investors generally want the best of both worlds.

Robert Wilson, research analyst at FE agrees with this view: “Over the past two years, Absolute Return funds have generally not done their job of delivering positive returns regardless of whether the market goes up or down. 

“With valuations stretched in many markets, investors are wary of a correction and even though Absolute Return Funds have struggled, investors may be betting the environment is finally becoming more conducive to them. Also, there is the fact that this sector will always be one to watch because if there are two things investors want, it’s the prospect of positive, reliable returns combined with low volatility.”

Additionally, it’s important to realise that performance is not the sole aim in portfolio construction, and Absolute Return strategies can add value to a portfolio by controlling risk and adding diversification benefits.

 

[1] https://www.fca.org.uk/publication/market-studies/ms15-2-3.pdf