Absolute return funds, in theory, should provide investors with a positive real return in all market conditions, although whether they should be expected to do so has been questioned by the Financial Services Authority (FSA).
The body has said that the marketing of these funds has been misleading at times, with names such as absolute return implying guarantees about capital protection that cannot be given.
Although this controversy has caused the funds to receive a bad press, the most recent IMA sales figures show the sector was the best-selling among retail investors in September and among institutional investors for eight out of the past 10 months.
Data from FE Analytics shows that even though hopes for absolute capital protection cannot be met by the sector, it still contains many portfolios that have beaten inflation over three years, while protecting effectively against the downside.
There are 14 funds in the IMA Absolute Return sector that have outperformed the consumer price index (CPI) over this period.
In terms of volatility, Insight Absolute Insight comes out on top, with the lowest score over three years of just 2.34 per cent.
Volatility of funds over 3-yrs
| Name | Volatility |
| Insight - Absolute Insight | 2.34 |
| Scot Wid HIFML - Absolute Return | 2.37 |
| MFM - CPI Defensive Managed | 2.77 |
| Threadneedle - Credit Opportunities | 2.9 |
| BlackRock - European Absolute Alpha | 3.05 |
Source: FE Analytics
The £369.2m fund has five crowns from FE and is third in terms of five-year returns out of the nine funds with a track record that long.
It has made 25.41 per cent over that time while the cumulative figure for CPI is 17.28 per cent.
Tim Cockerill, head of collectives research at Rowan Dartington, said: "Insight have created a range of absolute funds and this particular one operates as a fund of these funds. So the critical thing is fund allocation but choice is restricted to just Insight Absolute funds."
"By nature these funds are all cautious and so this fund of funds offers low-risk diversification. Results have been pretty good since launch in 2007 but certain market conditions appear to suit the fund better than others; at present it seems conditions are favourable."
Scottish Widows HIFML Absolute Return, MFM CPI Defensive Managed and Threadneedle Credit Opportunities are the three other funds with a volatility score below 3 per cent.
Cockerill points out that Scottish Widows HIFML Absolute Return is a tiny £2m portfolio that invests in larger Scottish Widows funds.
"I’m not a fan of fettered fund ranges but it seems unlikely this will let you down due to its diversification."
"Of the funds highlighted it is the better performer so credit is due to the manager for his fund selection, but having only five funds is a risk if markets change direction," he said.
"The MFM CPI Defensive Managed fund’s largest position is in EEA Life Settlements (14 per cent), which is suspended, and that makes managing the portfolio difficult."
"So, whilst the performance record to date has been OK, future performance is much harder to predict. Until the EEA issue is resolved I would be very careful of using this fund."
Threadneedle Credit Opportunities was launched in April 2009 and has amassed £308.3m in assets under management.
Cockerill described it by saying: "The fund uses a wide range of tools to deliver an absolute return, that is to say a positive return whatever the market conditions, and so will take short positions and use hedge fund strategies such as pairs trades to add and protect value."
In terms of the lowest max drawdown – the most investors could have lost if they had bought and sold the fund at the worst possible moments – four out of five are the same, but Standard Life GARS also appears on the list.
Volatility and max drawdown of funds
| Name | Max drawdown | Volatility |
| MFM - CPI Defensive Managed |
-2.77 | 2.77 |
| Insight - Absolute Insight | -3.55 | 2.34 |
| BlackRock - European Absolute Alpha |
-3.96 | 3.05 |
| Scot Wid HIFML - Absolute Return |
-4.05 | 2.37 |
| Stan Life Inv - Global Absolute Return Strategies | -4.79 | 4.62 |
Source: FE Analytics
Standard Life GARS dominates the sector in terms of size, with assets under management currently standing at £13.4bn, according to data from FE Analytics.
Mark Dampier, head of research at Hargreaves Lansdown, suspects that the recent popularity of the sector is reflective of the huge amount of money going into this fund.
"I own the fund myself and it has done well given that it has had just about the hardest circumstances to deal with since launch," he commented.
"Over five years it has even beaten the All Share and it also doesn’t have a performance fee, which is pretty important to me."
Performance of fund versus sector and indices over 5yrs
Source: FE Analytics
The other fund to appear on the list of those with the lowest max drawdown and the lowest volatility is BlackRock European Absolute Alpha.
Cockerill summed it up by saying: "This fund uses an equity long/short strategy with the aim of generating an absolute return irrespective of market conditions and as such the overall risk within the fund is low."
"However, having the tools to deliver a given return is not the same as actually doing so. Having said this, the fund manager has been producing steady numbers which is good but risk is still a characteristic of the fund, which investors should be aware of."