Brewin Dolphin has been buying absolute return funds in preparation for further market volatility caused by numerous headwinds and highlights the Henderson UK Absolute Return fund as its preferred portfolio from the sector.
The first seven months of 2015 were marked by a spike in volatility, with both equity and bond markets rocked by sell-offs and persistent periods of volatility. Up to the end of July, the FTSE All Share was up about 3.4 per cent but had gone through a rocky ride to get there and, as the graph below shows, it was a similar story with other asset classes.
Price performance of indices over 2015
Source: FE Analytics
Commentators are split on the outlook for the rest of the year, but many expect to see further volatility given the clear headwinds that can be seen.
The major risk looming is interest rate rise from the US Federal Reserve and the Bank of England. Although the Bank is not expected to make its first month until 2016, the Fed has indicated that it could make it first rate hike since the financial crisis as soon as next month.
Added to this is the continued sell-off in Chinese mainland shares, which had been rallying strongly since the middle of 2014 but started to tumble in June – with the Shanghai Composite down some 30 per cent from its recent high. Meanwhile, Greece continues to have the potential to rattle markets despite a deal being reached with its creditors.
This has led more investors to channel cash into absolute return funds. Indeed, the latest figures from the Investment Association showed the IA Targeted Absolute Return sector was the most popular peer group among private investors in June after attracting £445m; it has also been institutional investors’ favourite peer group for nine of the past 11 months.
Michael Paul, fund analyst at Brewin Dolphin, said: “We have been increasing our position in absolute return funds recently in light of the growing market uncertainties. Against a backdrop of potential rate rises in the UK and US, increasing turmoil in the Chinese economy and the persistent rumbles from the Greek crisis, assets which target consistent returns irrespective of equity or debt market performance are attractive.”
“Within the IA Targeted Absolute Return sector we would highlight the Henderson UK Absolute Return fund. The fund, managed by Ben Wallace and Luke Newman, invests both long and short in UK equities. The portfolio can broadly be split into two sections, the core and tactical books. The core book looks for long-term structural themes, whilst the tactical book targets short-term market inefficiencies.”
Henderson UK Absolute Return uses derivatives known as ‘contracts for difference’, or CFDs, to bet whether businesses’ shares will go up or down, looking for companies that appear to be too cheap or too expensive. They aim to make double-digit returns on average each year while taking as little risk as possible.
FE Analytics shows the fund has returned 48.30 per cent since launch in April 2009. While this is better than the average absolute return fund and gilts, it is less than half the gain of the FTSE All Share – although the graph below makes clear how much smoother ride the fund has given investors.
Performance of fund vs sector and indices since launch
Source: FE Analytics
Wallace and Newman, who are both FE Alpha Managers, focus on UK equities and this means their fund is riskier than the typical absolute return funds.
Our data shows its annualised volatility since launch has been 4.01 per cent while its maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – has been 3.93 per cent; in the sector, the averages for these metrics are a respective 2.47 per cent and 2.51 per cent.
However, the fund has held up well in down years. In 2011, when the eurozone sovereign debt crisis prompted equity market falls, the fund lost just 0.44 per cent while the average IA Targeted Absolute Return fund lost 1.26 per cent and the FTSE All Share fell 3.46 per cent, after a steep fall.
Performance of fund vs sector and indices in 2011
Source: FE Analytics
Wallace and Newman also started a hedge fund using a similar strategy before launching the OEIC in 2009. When the global financial crisis sparked a 30 per cent fall in the FTSE All Share in 2008, the managers’ hedge fund achieved a positive return of a similar magnitude.
It’s not just Brewin Dolphin that has noticed the fund. According to FE Analytics’ market movements tool, Henderson UK Absolute Return has captured the fifth highest net inflows of the sector over the past year after taking in £191m. Only Standard Life Investments Global Absolute Return Strategies, Invesco Perpetual Global Targeted Returns, Newton Global Dynamic Bond and Newton Real Return have taken more.
The fund is also highly rated by the analysts in the FE Research team and has been given a place on the Select 100.
Our analysts said: “This fund could be a good option for an investor who wants to invest in the stock market while limiting risk. The ability to short stocks has allowed the managers to limit losses in falling markets in the past and sometimes to make a lot of money.”
Henderson UK Absolute Return has a 1.06 per cent clean ongoing charges figure, but charges a 20 per cent performance fee that is subject to a hurdle rate and high water mark.
