Sure who wouldn’t like them?
Investment funds that can deliver positive returns in any kind of market conditions at a lower level of risk. That’s broadly what Absolute Return funds say they do. (Yes I know, the managers will use phases like over a reasonbable time frame, market cycles etc. but let’s be grown up here – reasonably consistent positive returns was the pitch)
And it was very – I mean very – successful. In the UK Investment Association Absolute Retun category there were 20 funds in 2009. There are 74 today with total assets of £69bn. These funds have been a huge success both on an insitutional and retail basis. Well a huge success in asset gathering terms!.
Investor experience hasn’t been that great.
It’s been poor – and as far as some of the block-buster funds in the sector are concerned it’s been poor for quite some time.
For a while it was that market conditions didn’t suit (even though they weren’t supposed to be a factor at all). Reminds me of 1991 when British Rail complained about the wrong type of snow!
Drawdowns (moves from peak to trough) have also been more severe than was anticipated. Investors rightly get unnerved when we see a downward shift in value of c. 8% in a proposition that emphasises low volatility.
Absolute Return funds seem to polarise the investment community. We have seen some outflows, quite significant in some funds. In aggrgate according to Morningstar data we did see outflows in mid 2018, but this was the first since 2011. However most investor surveys suggest a signifcant proportion of investors are looking to increasetheir allocation to the category over the next 12 months.
Can performance pick up? Well yes it can and I suspect that’s the reason we haven’t seen a greater level of outflows. Investors hoping to recapture some of the lost ground.
However, hope is not great as an investment strategy.
Remember even with all the diversification and risk management going on within a multi-strategy absolute return fund, it still hinges on a “view” – a view on growth, interest rates, inflation etc. And this view underlies a lot of the portfolio positioning. These views can lead to a long position in European banks, a position in copper futures or a short position in developed market soveriegn bonds etc. But what if the view is wrong……..?
Also increasingly I believe we have seen more and more macro outcomes not translating into the asset outcomes we might have expected in the past. I believe this is one of the reasons that recent reality has not mirrored the promise.
Consistently delivering a return of 3-4% above cash is a challenge. Especially in a climate of low inflation and bond yields and equity markets well advanced in the cycle. Absolute Return funds in the past have had the benefit of benign tail winds of both strong bonds and equities and improving economies. This can’t be counted on.
For funds who look to beat a benchmark such as the S&P 500 in the US or FTSE in the UK, underperformance may mean that you don’t make as much as the overall market. In the absolute return world, underperformance translates directly into losses.
I believe Absolute Return can work but it’s tough. I think the range of performance withinthe sector is greater than in conventional sectors. I also think consistency of performance is harder to establish – beware of fantastic one year records!
I looked at the performances in the Morningstar Absolute Return Multi-strategy sector. For the top ten funds over one year, only five even existed three years prior. Of the top ten over three years again only five existed two years before that and for the top ten funds over five years only three existed in the prior period. Fund selection is critical – this is not a generic sector. Manager skill and risk budgetting are the key differentiators.
Future articles will focus on the track record of absolute return managers in single asset classes and whether this might offer a more stable outcome.
Tradewinds 