Investors have been pulling money out of some of the biggest names in the absolute return sector in recent months due to underperformance, according to research by investment platform AJ Bell.
According to the Investment Association trade body, the funds should aim to achieve a total return greater than a zero over a period no longer than three years.
The basic idea behind absolute return strategies is to forego some upside in good times, in exchange for mitigated downside in bad times. In the ideal scenario, long-term returns would compare favourably with traditional investments, but the ride would be a lot smoother.
In reality, some of these funds that are supposed to provide consistently positive returns in all market conditions have been losing investors money.
“Lacklustre performance has marred the sector recently and the funds seeing the largest outflows have failed to meet their own performance benchmarks,” according to Laura Suter, personal finance analyst at AJ Bell.
The IA Targeted Absolute Return sector, which has total funds under management of £61.8bn, is home to various strategies investing across a range of asset classes.
Yet, Suter said a number of the funds have even failed to preserve capital.
“We’ve also had a period where inflation has spiked, and investors have seen many of these so-called safe haven funds fail to even beat inflation over the past five years,” she explained.
Source: Investment Association
Predictably, investors have decided for the most part to seek their fortunes elsewhere.
“Investors have been ditching absolute return funds in their droves over the past year, with the past 11 months seeing consistent outflows, as investors pulled £5.4bn from the funds,” she said.
This marks a fall from grace for the sector, which was the best-selling asset class in both 2015 and 2016, Suter added.
“While there have been some investors willing to put money into absolute return funds, the levels of inflows have been tiny in comparison to the outflows,” she said.
Absolute return funds are different from traditional investments in three significant respect: They employ techniques that are expected to profit from both up- and down-markets and stock prices. They have lower correlation to the return patterns of other asset classes. They are not benchmarked against any sector or index.
By using techniques not available to traditional fund managers, these funds aim, ideally, to generate smoother returns throughout the market cycle.
The sector has gone through a period of sustained underperformance, with many funds failing to achieve their performance target, causing an exodus of investors from the so-called ‘all-weather’ funds.
The table below shows the top-10 IA Targeted Absolute Return funds with the largest outflows over one year.
Source: AJ Bell
As Suter noted, the collective inflows of the top-20 funds over the past year doesn’t even amount to half the outflows seen on the Standard Life Investment Global Absolute Return Strategy alone.
“Of the 10 funds that have seen the largest outflows over the past year, eight have failed to meet their own performance targets, while one has no clear benchmark and one doesn’t have five-year performance data,” Suter explained.
“Of the nine that do have a five-year track record, five have failed to hand investors a return above inflation over that period.”
Standard Life Investments Global Absolute Return Strategy – commonly known as GARS – has the dubious distinction of topping the list.
“Standard Life Investments Global Absolute Return Strategy, seen as the flagship fund for the sector, has seen the largest outflows with investors pulling almost £10bn over the past year and more than £18.5bn in the past three years,” Suter said.
The fund aims to target a level of return over rolling three-year periods equivalent to cash plus five per cent per year, gross of fees. It has experienced a period of underperformance, falling far short of its target of cash returns plus 5 per cent a year, over a rolling three-year period, she pointed out.
“Over the past five years the fund has returned just 5.81 per cent, less than inflation during that time. However, the fund has rebounded in the past year, returning 4.9 per cent, ahead of average inflation of 2 per cent and the one par cent average return of the sector.”
Actively managed by the multi-asset team, the GARS fund uses a combination of traditional assets (such as equities and bonds) and investment strategies based on advanced derivative techniques, resulting in a highly diversified portfolio.
The Merian Global Equity Absolute Return fund, meanwhile, has recorded the worst return over one year.
“The Merian Global Equity Absolute Return fund has clocked up £4bn of outflows over the past year, the bulk of which has been over the past six months when investors withdrew £2.6bn of money,” Suter said.
Jointly managed by Amadeo Alentorn, Ian Heslop, and Mike Servent, the fund has no specified benchmark and has, over the longer-term, “delivered 10.5 per cent total return to investors, ahead of inflation and the sector average,” Suter said.
The fund aims to deliver absolute returns over rolling 12-month periods that have a low correlation with equity and bond markets, through a market-neutral portfolio of global equity stocks. It has an annualised volatility limit of 6 per cent.
Performance of funds vs sector over 1yr
Source: FE Analytics
BNY Mellon Real Return is the fund with the best one-year return. It aims to achieve significant real rates of return in Sterling terms predominantly from a portfolio of UK and international securities.
In spite of a period of underperformance, this fund, co-managed by Aron Pataki, Suzanne Hutchins, and Andy Warwick has beaten the sector over one, three, and five years.
At the bottom of the performance ranking over five years is the GAM MultiBond Absolute Return Bond, managed by the firm’s absolute return bond team.
“It has delivered a loss of 1.1 per cent over the past five years, not even meeting its own low benchmark of beating the three-month Libor rate, which was 2.9 per cent over five years,” added Suter.
The fund invests worldwide in bonds of various maturities, credit ratings, countries and currencies, as well as in derivative financial instruments.
Suter noted that GAM MultiBond Absolute Return Bond is one of those suspended and liquidated by GAM, following its suspension of fund manager Paul Heywood.