However, it has come under fierce attack from critics who say many of the funds within it do not serve their alleged purpose.
In the first of a new series, FE Trustnet reveals the funds in the sector that have the highest ratings from FE across the board, using three key measures.
How the ratings work
The highest FE Crown Ratings go to funds that score highest across a blend of Alpha, volatility and consistency measures – favoring those that produce a steady, manager-led performance with minimal risk.
FE Alpha Manager ratings go to the top 10 per cent of fund managers in the UK and are awarded only to those who have added real value to the performance of their funds.
Funds that appear in the FE Adviser Fund Index are chosen by FE's panel of leading independent financial advisers, and represent the best picks of some of the UK’s leading fund selectors.
Insight Absolute Insight
FE Crown Fund Rating: 5
FE Alpha Manager Rating
Constituent: AFI Aggressive, AFI Balanced, AFI Cautious
Insight Absolute Insight is the most highly rated fund in the sector, with the highest FE Crown Fund Rating, and a place in each of the three AFI indices – meaning advisers have chosen it as a fund suitable for an aggressive, balanced or cautious approach.
The fund is managed by FE Alpha Manager Reza Vishkai and pursues a cash-plus strategy, aiming to achieve positive returns in all market conditions through a fettered portfolio of Insight funds, which themselves pursue a variety of hedge-fund style strategies.
Over five years to date, it has returned 25.4 per cent to investors, beating the average fund in the IMA Absolute Return sector and the FTSE 100 index by a margin of almost 15 percentage points.
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
The fund has achieved this outperformance while maintaining a strong grip on its risk exposure.
It has a Beta of 0.21, meaning its sensitivity to index volatility is very low. At this Beta, a movement of one point in the index would result in a movement of less than a quarter of a point in the fund’s performance.
Volatility – a measure of how widely the fund’s returns deviate from the average over time – is low as a result, weighing in at 2.33 per cent over the period.
During the same five years the average fund in the sector has recorded a volatility of 3.15 per cent while the FTSE 100 index has recorded an eye-watering 23.23 per cent.
The £369m fund has a TER of 1.26 per cent and a minimum investment of £5,000.
CF Ruffer Absolute Return
FE Crown Fund Rating: 4
FE Alpha Manager Rating
CF Ruffer Absolute Return has a four crown-rating from FE, putting it in the top 25 per cent of UK funds, all of which are measured by these bias-free quantitative ratings.
It has returned the most to investors in this group.
The fund is managed by not one but two FE Alpha Managers, Steve Russell and David Ballance.
It has returned more than 50 per cent to investors over the last five years, during which time the average fund in the sector has made 10.9 per cent and the FTSE 100 itself has delivered 10.6 per cent.
Managed with a flexible but relatively straightforward approach, the fund relies heavily on stock picking, investing in a portfolio of equities, bonds, currencies and other funds held in a sub-fund within the larger portfolio.
Unlike many funds in the sector, the fund does not invest heavily in derivatives and exotic instruments, relying instead on a strong active trading discipline and a highly experienced management team.
As a result most of its investments are recognisable to the average punter.
The fund has a low Beta of 0.54, but volatility is higher than that of the Insight fund – reflecting its use of conventional investments and a focus on long-only investments – at 8.16 per cent.
This volatility is considerably higher than the average for the sector, at 3.15 per cent, but much lower than that of the FTSE 100 – 23.2 per cent – and amply rewarded by long-term performance.
Newton Real Return
FE Crown Fund Rating: 3
FE Alpha Manager Rating
Constituent: AFI Balanced, AFI Cautious
Newton Real Return has a three crown-rating from FE, putting it in the middle of the field by this measure.
It is highly regarded by IFAs who have chosen it for the AFI Balanced and Cautious indices, and is a well-known name among retail investors.
The giant £6bn portfolio has returned 31 per cent over five years, beating the average fund in the sector by 20 per cent.
FE Alpha Manager Iain Stewart, who took control of the fund in 2004, is a veteran manager who has returned 82.4 per cent to investors since starting his career in 1999.
His peer group composite returned 31 per cent over the same period.
The Newton fund has returned 31 per cent over five years. It invests in a broad range of assets, including traditional equities and bonds alongside derivatives, and has a low Beta of 0.32.
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
Volatility is moderate, at 9.83 per cent, higher than the average fund in the sector but far below the score of a FTSE 100 tracker.
The fund has a minimum investment of £1,000 and a TER of 1.61 per cent.
Jupiter Absolute Return
FE Alpha Manager Rating
Constituent: AFI Aggressive, AFI Balanced, AFI Cautious
Jupiter Absolute Return is a relative newcomer on the absolute return scene, but has proved popular with IFAs on the AFI selection panel, who chose it for inclusion in all three of the indices. This makes it suitable for investors with a cautious, balanced or aggressive strategy.
Launched in 2009, it is managed by FE Alpha Manager Philip Gibbs who hit the headlines with a stunning performance from Jupiter Financial Opportunities and the financials fund range at the group.
Gibbs, who has been with Jupiter since 1997, has returned 273 per cent to investors since FE records began in 1999, while the average investor he has competed with – according to his peer group composite index – has returned a meager 22.5 per cent.
The fund invests on a global scale using a flexible multi-asset approach.
It holds a broad range of instruments – including derivatives – and focuses heavily on asset classes where the manager thinks it is appropriate.
At present the fund’s heaviest weighting is towards fixed interest investments, which make up more than 10 per cent.
Since launch it has returned 6 per cent to investors, three times the amount the average fund in the sector has made, but it has underperformed the FTSE 100 by a long way.
Investors looking for exposure to this sector should be aware that steady positive returns will not look glamorous when compared with returns from the FTSE during positive periods, and should consider the volatility they have managed to avoid at times like this if they want to feel better.
An investment in a FTSE 100 tracker would have endured volatility of 17.13 per cent, and a maximum loss of 11 per cent, during the period since the fund went live.
While the Jupiter fund has not returned a huge amount in comparison, it has done so with a Beta of 0.9 per cent, and volatility of 6 per cent, making it a much smoother ride.
The fund has a TER of 1.48 per cent and requires a minimum investment of £500, but investors should be aware that it also charges a performance fee.
If you'd like to conduct your own research into the top rated funds on FE Trustnet, you can search for funds across our database using our specially developed ratings filter.