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The shine comes off absolute return

The Week | Adviser-Hub |

Standard Life’s GARS fund is under pressure: performance has waned and it is seeing outflows. Does this say something about the wider absolute return sector?

  • The targeted absolute return sector has seen weakness in its standard-bearer
  • The sector’s aggregate performance has been relatively weak compared to bullish stock and bond markets
  • The sector has some gems, but investors need to look carefully

Standard Life’s GARS fund has become something of a bellwether for the targeted absolute return sector, but recent weak performance has seen investors pull money from the fund. The sector is already controversial and the problems at GARS may sap investor enthusiasm further.

Absolute return funds have had to contend with raging bull markets in stock and bond markets. This means the sector sits uncomfortably at the bottom of the league tables over five years. The average fund is up just 18.8%, compared to 70.3% for the UK All Companies fund is up 70.3% over five years (source: Trustnet to 28 August 2017) and 27.5% for the average strategic bond fund.

Of course, this is a bit disingenuous. Absolute return funds are there to help manage risk not simply to deliver punchy returns. They are supposed to give a smoother ride to investors, with less vulnerability to stock market highs and lows. The problem is, they haven’t totally done this either, with plenty of funds seeing meaningful drawdowns at various points.

The Investment Association has been sufficiently concerned to put in monthly statistics for each fund in the sector, showing how many times each fund failed to deliver returns greater than zero (after charges) for rolling 12 month periods. 31 funds fail to hit the target at least half of the time.

This looks bad for the sector as a whole, but then there are plenty of funds doing relatively well, delivering as expected. Invesco Perpetual and Aviva – both teams are ex-GARS - have delivered on target. Among long-short funds, credit should go to the team on the BlackRock UK Absolute Alpha and the Jupiter Absolute Return fund under James Clunie.

Managers in the absolute return sector have lots of tools to target their ideas, but that’s only as good as the quality of ideas. It gives maximum exposure to active fund management. There are funds who do it really well, delivering a high alpha score, low maximum drawdown and low volatility, but investors need to tread carefully.

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