Absolute return funds aim to deliver positive returns over the short-term – often rolling one- to three-year periods – which means they should offer you the peace of mind of being able to put away your money for the short-term without having to worry about it falling in value before you need it.
The funds have come under criticism in recent years for failing to deliver on this promise, but Chelsea Financial’s Darius McDermott says they could soon have their day.
The obvious choice in the sector is the massive Standard Life GARS fund, but with more than £17bn in assets under management and a recent shake-up in its management, investors may want to consider some of the alternatives listed below.
CF Odey Absolute Return
The four crown-rated CF Odey Absolute Return fund is the best performer in the IMA Targeted Absolute Return sector over the last one and three years.
With just £762.3m in assets under management, it is significantly smaller than the GARS fund.
It has picked up 118.91 per cent over the past three years, compared with a mere 9.28 per cent from its peers. The fund’s benchmark – the FTSE All Share index – gained 38.02 per cent over the period.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The fund, which aims to provide a positive absolute return over a 12-month period independent of market conditions, has held true to its word. In each of the three calendar years since launch, and so far this year, the fund has stayed in the black.
It was particularly impressive in the falling markets of 2011 when the sector lost 1.26 per cent. CF Odey Absolute Return made 3.14 per cent that year.
The top-10 holdings, which include Sky Deutschland, Samsung Electronics and Warren Buffett’s investment holding company Berkshire Hathaway, account for nearly 50 per cent of the portfolio
The fund has certainly been less stable than its peers, with an annualised volatility score of 13.28 per cent over the past three years compared with just 2.42 per cent from the sector.
The fund has a higher barrier to entry than many of the absolute return strategies on offer, with a required minimum investment of £5,000. It has ongoing charges of 1.45 per cent.
Cazenove Absolute UK Dynamic
Another fund punching above its weight in the IMA Targeted Absolute Return sector is the £305.7m Cazenove UK Absolute Dynamic fund, headed up by FE Alpha Manager Paul Marriage.
The five crown-rated fund aims to achieve absolute returns through targeted investment strategies independent of UK market conditions. As Marriage is one of the leading smaller companies managers in the UK, the fund has a bias toward mid and small cap stocks.
Cazenove Absolute UK Dynamic has been a strong performer over the last one and three years, beating both the sector and FTSE All Share over both periods.
The fund has made 53.04 per cent over the past three years, according to FE Analytics.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
While the fund has shot the lights out on a rolling 12-month basis, it has stayed in positive territory over each of the last three calendar years and so far this year, with returns of between 5 and 15 per cent.
The largest holding in the portfolio is FTSE 250 industrial inkjet printhead firm Xaar. Hardware, and telecommunications, media and technology are the two largest sector weightings, with Carphone Warehouse and Smart Metering Systems featuring in the top-10 holdings.
Although the fund is tilted in favour of small and medium companies, it is actually less volatile than the Odey fund. Over the last three years, the Cazenove portfolio has an annualised volatility score of 6.14 per cent.
It requires a minimum investment of £1,000 and has ongoing charges of 1.64 per cent.
Henderson European Absolute Return
For investors who want to diversify some of their exposure away from the UK, they may want to consider the Henderson European Absolute Return fund, run by FE Alpha Manager John Bennett and Leopold Arminjon.
The four crown-rated fund is one of the best performers in the sector over the last one and three years, picking up 22.91 per cent over the latter period.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund has no specified index, but as a basis of comparison, the MSCI Europe index made 25.69 per cent over the same time.
Unlike the other funds on this list, the Henderson portfolio had a tough time at the start. The fund lost money in both 2010 and 2011, but has picked up momentum as sentiment in Europe has improved.
So far this year, it has made 14.89 per cent, beating both the sector and MSCI Europe index.
Henderson European Absolute Return is backing healthcare stocks in Europe, with nearly 20 per cent of the fund in the sector. Germany pharmaceutical giant Bayer and Swiss pharmaceutical leader Novartis feature in the top-10 holdings.
While the majority of the fund is invested in European holdings, it does have a 17.4 per cent allocation to the UK.
It requires a minimum investment of £1,000 and has ongoing charges of 2.02 per cent.
As FE Trustnet revealed earlier this week, Invesco Perpetual has recently launched its own GARS rival, the Invesco Perpetual Global Targeted Returns fund.
