Amidst the outflows from the IA Targeted Absolute Return sector, large groups of investors are looking for steady returns elsewhere.
However, David Millar, one of the managers of the £7.4bn Invesco Global Targeted Return fund, said in an uncertain environment, finding a steady stream of return is not so straightforward.
Its style of investing was born in response to volatility and Millar believes that markets could see more upheaval over the next decade.
As such, absolute return strategies could still play a role for investors seeking a steady rate of return through a risk-allocated, diversified portfolio, he said.
Millar (pictured) said that because of diversification within the portfolio, the fund didn’t go down with the markets but missed out on the rebound. 
“Steering a steady course through the middle is what this is all about,” he explained.
The manager explained that looking forward, rather than backward is the key for this style of investing.
“None of us have seen monetary and fiscal policy being unleashed in the way that it has,” he said. “What we’ve witnessed in the last couple of years, is these bursts of volatility and then everything going back to normal.”
Uncertainty remains surrounding investor income in an environment of dividend cuts and low yields on bonds.
“The role of this style of investing is as alive now as it’s ever been,” said Millar.
The common theme within the strategies of absolute return funds is a staunch investment approach, but similarly to the sector as a whole it has undergone evaluation in response to the recent outflows.
“A robust repeatable process is incredibly important,” he said. “From a global perspective there is so much to choose from, so you need that solid process.
“The hurdle for an investment idea is that it should be seen by the collective team to be able to deliver a positive return on a two-to-three year view in our central economic thesis.”
This involves trying different combinations to see what that does to the portfolio while maintaining low volatility for the fund.
“Having low volatility is part of the hallmarks of this style of investing,” he added.
But managing volatility each month since the sell-off has required a different approach, which alters the level of risk allocation, said the manager.
Over the course of 2019, the Invesco Global Targeted Return fund returned 2.60 per cent. However, it lagged in 2020 as it failed to participate fully in the rebound that followed the coronavirus-fuelled sell-off in markets during March.
Performance of fund vs sector YTD
Source: FE Analytics
Missing out on the rebound meant that since the 31 December, it has made a loss of 2.03 per cent.
“We were cautious going into the turn of the year,” Millar explained. “Our central economic thesis was fairly neutral.”
He asked: “How do you participate in momentum when your two-to-three year view might be more cautious?”
With ongoing outflows from the IA Targeted Absolute Return sector, changing the way in which investors view absolute return strategies could be the key to restoring confidence, according to Millar.
“What investors need to realise is that we do have more than one benchmark, it is a return, but it’s also risk management,” he said. “And if you’re not wanting to manage according to risk because you believe everything is one directional than that’s where these strategies fade in popularity.
“It just takes a bit of volatility or disappointment and then this looks a lot more interesting again as a concept.”
He continued: “None of us ever thought a 100 per cent of a portfolio should be in this style of investing. But it’s very complementary alongside other more traditional asset classes or long-only type portfolios as well.
“Ultimately we’re trying to give a diversified outcome ourselves but we’re also a diversifier within an investors broader portfolio.”
Improving returns would inspire confidence, but whether that would be enough to keep investors within the sector remains to be seen.
“Volatility will keep them in the sector,” he said. “If that volatility continues over time, then there’s a case for steering a steady path right through the middle of it.”
This largely comes down to understanding the different demographics of investors and whether a steadier, more reliable rate of return is preferred.
The manager said the outlook often hinges on the levels of risk and volatility ahead.
“It feels like we’re in volatile times for all sorts of reasons,” he said. “These types of products were born out of that same volatility that hurt investors so much that they looked for low volatility sources.
“In these difficult times, a risk-managed return seeking objective as an alternative to volatile equities or low returning bonds or a bit of both is part of a rational investors portfolio. Here I am 12 years into absolute return saying now’s it’s time [to buy these funds].”
Invesco Global Targeted Returns aims to achieve a positive total return in all market conditions over a rolling three-year period and targets an annual return (gross of fees) of 5 per cent in excess of its UK three-month Libor benchmark. It aims to do this with less than half the volatility of the sterling-hedged MSCI World index over a rolling three-year period.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Invesco Global Targeted Return has returned 17.06 per cent since its launch in 2013, compared with a 46.38 per cent return for the LIBOR GBP 3m +5% benchmark. It has an ongoing charges figure (OCF) of 0.87 per cent.