However, looking at calendar-year performance reveals the majority of funds in the sector have failed to achieve this over the long-term.
Of the 16 funds in the IMA Absolute Return sector with a track record extending back to 2008, only one has delivered positive returns over all five calendar-year periods – the little-known Insight Absolute UK Equity Market Neutral fund.
Calendar-year performance of fund vs sector since 2008
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) |
|---|---|---|---|---|---|---|
| Insight Absolute UK Equity Market Neutral | 1.55 | 3.35 | 2.16 | 1.79 | 3.49 | 6.31 |
| IMA Absolute Return | 1.91 | 3.41 | -1.26 | 4.32 | 8.61 | -3.6 |
Source: FE Analytics
Since inception in October 2007, the four crown-rated fund has made 19.46 per cent, while the sector has picked up 14.33 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
The £679.5m fund has risen steadily over its entire duration. Over the last five years, it has an annualised volatility of just 1.62 per cent, making it the most stable of any fund in the IMA Absolute Return sector.
Over this period it has also been significantly less volatile than the IMA UK Gilts sector – traditionally perceived as a safe haven – which has a score of 5.11 per cent.
The fund also has the lowest max drawdown in its sector over five years, at 0.91 per cent.
The max drawdown calculates how much an investor would have lost if they bought and sold at the very worst moments. To put Insight Absolute UK Market Neutral’s figure in perspective, the average gilt fund scored 6.25 per cent, and the FTSE All Share scored 42.39 per cent.
To most people, the threat of losing half of their money is enough to make them consider stuffing a few quid in the mattress instead.
However, with cash yielding next to nothing and inflation running high, this is not a viable option; the Absolute Insight fund is suitable for such investors as it has also managed to beat cash and inflation since its launch.
Performance of fund vs cash, inflation and index since launch
Source: FE Analytics
With many highly rated fund managers predicting that markets could be about to tumble, a portfolio such as this is an option for those who are getting a bit hot under the collar.
Darius McDermott, managing director at Chelsea Financial, says he rates the fund highly, particularly as a diversification tool.
"The fund is truly market-neutral," he said. "It doesn’t really mind if equities go up or down or sideways." The element that makes the portfolio so successful at protecting against the downside is its pair-trading system, whereby the managers play two stocks against each other – one on the long side and one on the short.
For example, the managers are currently long on Tesco; however, in order to eliminate the risk of the market falling, they have shorted Sainsbury.
This means that if the markets go down, they will only lose/gain the difference in performance between the two stocks. As long as Tesco performs better than Sainsbury, the managers make a profit.
Of course, this does not always work. Sainsbury could fall or rise by more than Tesco, and in a worst-case scenario, Sainsbury could rise in value and Tesco could fall. The managers would lose money in both cases.
However, this eliminates market risk and, as the fund’s performance record suggests, it has been very successful at pairing stocks together.
This is perhaps best illustrated during and after the Lehman crash. In the six months between 1 September 2008 and 1 March 2009, the fund was up 2.15 per cent. Over the same period, the Absolute Return sector was down 4.49 per cent and the All Share down 31.08 per cent.
The fund is managed by a four-strong investment team of Andrew Cawker, David Headland, Iain Brown and Richard Howarth – all of whom have been running the fund from inception.
The size of the management team allows the managers to focus on 10 to 15 pairs each, in a portfolio that typically runs 60 to 80 pair-trades.
The size of each individual allocation depends on the specific risks associated with each holding, as well as the liquidity of the stock – meaning whether or not it will be easy to offload should the managers change their view.
The team also takes the wider market environment into consideration, deciding how volatile each holding is and how closely correlated it would be to a market downturn.
The fund’s biggest long/short plays are currently in financials and consumer products, where the team has pitted some of the UK's biggest names against each other in order to protect investors’ capital, while also continuing to deliver an above-inflation return.
The fund requires a minimum investment of £3,000 and has a total expense ratio (TER) of 1.3 per cent. However, this does not include its performance fee, which charges 10 per cent annually on any return in excess of the 3 Month GBP Libid index.