Newton Real Return, 7IM Unconstrained and Invesco Perpetual Global Targeted Returns are three targeted absolute return funds that should be given a chance by investors despite the sector coming under fire over recent months, according to investment professionals.
It won’t have escaped investors that many commentators are become increasingly sceptical of the IA Targeted Absolute Return sector, given that many of last year’s worst-performing funds reside in this area of the market.
Table of 10 worst-performing IA funds in 2016
Source: FE Analytics
In an article published last month, Chelsea’s Darius McDermott told FE Trustnet that a lack of clarity on the sector has exacerbated investors’ disappointment in the losses many made last year.
“I will go so far as to say that historically I think the Investment Association has done a bad job with the sector,” he said.
“As it sits there is emerging market debt absolute return, absolute return bond funds, funds that use derivatives, funds that don’t use derivatives and in their wisdom around three years ago the big change the IA made was to change the name of the absolute return sector to the targeted absolute return sector.” 
Given the broad array of mandates that are housed under the same roof, does adopting a blanket ‘dislike’ of the sector mean that investors are missing out on pockets of opportunity?
Martin Bamford (pictured), managing director of Informed Choice, doesn’t currently recommend any targeted absolute return funds as he believes they aren’t needed as part of a suitably constructed, well-diversified portfolio.
However, if an investor is “absolutely desperate” to allocate some of their portfolio to a targeted absolute return fund, he says they should keep their total exposure to 5 per cent or less.
“Within the IA Targeted Absolute Return sector, it is hard to find a fund which has performed consistently well and delivered against its objectives. Funds have had an especially difficult time during the past 12 months, where they have been caught out by the unexpected market gyrations around Brexit and Trump,” he pointed out.
“A fund which has done very well despite this difficult market environment, and has delivered consistently good long-term results for investors, is 7IM Unconstrained.”
The £54.4m fund, which is managed using a team approach, aims to provide real-term growth over the medium-to-long term by beating UK inflation by 2 per cent over rolling three-year periods. It does so through a hugely varied portfolio, which consists of a blend of equities, fixed income, market neutral strategies and convertibles.
Since its launch in January 2012, the fund has returned 50.9 per cent and has done so with a maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 11.66 per cent.
While it has significantly outperformed its average peer, it has done so with much greater levels of volatility, which suggests it may not be best suited to the more cautious investor. That said, it is yet to finish a single year on a loss since its launch.
Performance of fund vs sector since launch
Source: FE Analytics
“This investment strategy comes at a cost, with ongoing charges of 1.36 per cent which will be unpalatable for many investors, especially those who prefer the low-cost index tracker fund approach to investing,” Bamford pointed out.
“There is however good diversification within the fund across more than 50 holdings and, with only £54m invested in this fund, it’s an undiscovered gem relative to the sector behemoth, Standard Life Investments Global Absolute Return Strategies.”
At the opposite end of the spectrum, Adrian Lowcock, investment director at Architas, would opt for Iain Stewart’s £9.5bn Newton Real Return fund.
It seeks to return a minimum of 4 per cent more than the 1-month GBP LIBOR interest rate per year over five years before fees. In doing so, it aims to achieve a positive return over rolling three-year periods.
While the fund has struggled to beat its benchmark at times, it has only made a loss during one year over the last decade when it finished 2011 down 75 basis points.
It also has a maximum drawdown of 11.96 per cent over the last decade.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“The main part of the portfolio is a mixture of UK and international shares and corporate bonds. Around this the manager also invests in cash, government bonds and derivatives to offer some capital preservation,” Lowcock explained.
“Shares are held of the longer term and aligned to Newton’s thematic approach to investing. The fund performed well versus peers in 2016 but lagged the strongly rising market as the fund was not positioned to benefit from the Trump rally and treasury stocks lagged the market.”
The fund has been awarded an ‘AA’ rating by the research team at Square Mile, partially due to the fact it is relatively unrestricted, is good value for money with an OCF of 0.79 per cent and adopts ESG research before considering investments.
“Iain Stewart is a veteran investor who has worked at Newton for over 25 years, managing both multi-asset and global equity mandates,” the team said.
“He has the able support of the experienced Newton Real Return team. The key attractions of this fund are the established Newton Global Thematic approach that is at the core of the process, combined with the experience of Mr Stewart.
“We think this is an appealing option for investors seeking a fund that is focused on capital preservation and delivering positive absolute returns over the long term.”
Jason Hollands, managing director at Tilney Group, would opt for Invesco Perpetual Global Targeted Returns as a core holding from the sector.
The £8.7bn fund, which is headed up by Dave Jubb, David Miller and Richard Batty, aims to achieve a positive total return across all market conditions, targeting a gross return of 5 per cent per annum above UK 3-month LIBOR. It aims to achieve this with less than half the volatility of global equities over the same rolling three-year period.
“I see this multi-strategy fund as very much as a ‘one-stop shop’ option for investors wanting to have a slice of their portfolio in a lower volatility bucket to provide some ballast,” Hollands said.
“The fund is in practice an umbrella for over 25 underlying distinct investment strategies which include investments across currency, equity and bond markets as well as views on movements in interest rates.”
The fund has been billed in the past as an alternative to GARS, given the managers were senior members of its management team before moving to Invesco Perpetual and launching the similarly-structured product in 2013.
Since launch, it has returned 20.39 per cent compared to its sector average’s return of 10.09 per cent. It has also achieved a positive return every year since its inception and has a maximum drawdown of 3.57 per cent over the same time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It has a clean ongoing charges figure of 0.87 per cent and yields 1.53 per cent.