Thorpe was discussing how to achieve absolute returns at an event for advisers hosted by three fund management groups that run absolute return funds: Cazenove Capital Management; Threadneedle and Legal and General.
"There are risks attached to absolute return funds and it is important that intermediaries recommending absolute returns understand how the funds operate because this is not a homogenous group of funds," he says.
Thorpe explains: "When the IMA launched this sector last April it was not designed to check relative performance because every single fund has a different approach. You have a global macro fund, an offshore fund, and a bond fund, all in the same sector – you cannot compare them. It is a place to find them."
He points out that prior to the IMA’s creation of the sector the BlackRock UK Absolute Alpha fund was placed in the IMA UK property sector and was subsequently moved into absolute return.
Thorpe adds: "There is a definite need for education about what these funds do. If they are promoted as delivering consistently positive returns that is incorrect. I would argue that it is more appropriate to promote the funds as delivering fewer negative months."
According to data available on Trustnet, the last six months have continued to challenge the sector, with a number of funds recording negative returns, including Cazenove UK Absolute Target fund, and the BlackRock Absolute Alpha fund which have both returned -1.9 per cent to 25 March.
Only seven recorded positive returns, although there is still a wide differential between the best and worst performers, for example, the Octopus Absolute Return fund returned 15.3 per cent while Way's EFA fund returned -9.6 per cent.
Returns - 6mth
| Fund | 6 mth% |
|
15.3 |
|
|
6.8 |
|
|
6.0 |
|
|
5.4 |
|
|
1.7 |
|
|
1.4 |
|
|
0.2 |
|
|
-1.9 |
|
|
-1.9 |
|
|
-1.9 |
|
|
-3.2 |
|
|
-3.5 |
|
|
-4.0 |
|
|
-5.3 |
|
|
-6.4 |
|
|
-6.8 |
|
|
-9.6 |
Alastair Caw, Threadneedle Investments’ investment sales director explains why a number of absolute return funds have experienced problems:
"I have experience of previously having worked for one of the groups who were one of the pioneers on the retail side. They had all the bells and whistles and the same objectives as the successful funds. Looking back, what they didn’t have was the necessary experience to use the instruments that UCITS III powers give them to actually generate those returns. There are probably a few groups in that position who had to close their vehicles.
"It is all very well being able to short something but unless you have to have the experience of when to short it or the instruments to trade those positions it is not going to work,” Caw adds.
According to Thorpe, the experience of the manager is crucial:
"Our industry is very good at jumping on bandwagons when we see assets flooding into a fund – and BlackRock has seen tremendous asset growth – but where are the other absolute funds? I don’t think there has been that many of them. The fact is a lot of big retail firms have said ‘we do not have the experienced managers to be able to launch these funds.’"
Thorpe believes that absolute return funds, including Cazenove's, have benefitted from employing managers that have a track record from the hedge fund world:
"There have not been a great many funds launched, but what we find is a number of hedge fund managers are bringing their techniques into the retail space," he says.
He argues that as the IMA absolute return sector grows - "which it inevitably will"– it will break up into more specialised sectors:
"You will find the absolute bond sector; the absolute market neutral sector, etc etc. And then you will be able to compare performance," Thorpe suggests.
Finding managers that are capable of performing over the longer term has been made easier by the launch of Trustnet Alpha Manager Ratings. These ratings track the performance of individual managers over time, rather than just the funds they currently may be managing.
On this basis Colin Harte (Baring Absolute Return Global Bond) and Iain Stewart (Newton Absolute Intrepid) have shown themselves capable of sustaining wealth generation over many years across both absolute return funds and funds classifed in other sectors.
Other data suggest that the sector as a whole, while facing the challenges outlined by Thorpe and Caw above and not managing overall to produce a positive return over either six months or one year, is still managing to maintain a top quartile ranking as a sector on a cumulative basis over the past half year.
Sector ranking 6mth
|
Sector |
6m |
1yr |
|---|---|---|
| Global Bonds | 8.8 | 8.7 |
| UK Gilt | 7.8 | 7.4 |
| Japanese Smaller Cos | 3.8 | -9.5 |
| Money Market | -0.3 | 1.2 |
| Protected/Guaranteed | -0.9 | -4.3 |
| Absolute Return | -1.3 | -1.1 |