Just 50 out of 95 eligible funds in the IA Targeted Absolute Return sector have managed to consistently provide positive returns on a three-year rolling basis, according to the latest study from FE Trustnet. 
To get to this conclusion, we ran three-year rolling data every month for the past three years (so 36 three-year periods in total).
Those funds with less than a three-year track record (at least one period) were discounted however not all funds had to have the full six-year performance track record – merely at least one period.
For example, L&G Multi-Asset Target Return has achieved the feat of always maintaining a three-year rolling positive return even though it has only been eligible for two monthly periods.
Ben Conway, senior fund manager at Hawksmoor Fund Managers, said: “If you have to use a period over which to judge a fund that is as good as any.
“If a fund that puts itself in that sector can’t achieve a positive return over a three-year rolling basis then it has to question its existence.”
Yet just 52.6 per cent of funds in the IA Targeted Absolute Return sector have achieved the feat, a “shoddy” performance, according to the multi-asset fund manager.
This is particularly poor when considering the market conditions over the last three-to-six years which has been generally supportive for markets.
Performance of indices over 6yrs
Source: FE Analytics
Indeed, as the above chart shows, equities (as represented by the MSCI AC World) rose 116.81 per cent while bonds (the Bloomberg Barclays Global Aggregate index) gained 25.76 per cent.
“It is historically always tougher for absolute return funds to generate positive returns in bear markets and the fact that we haven’t been in a bear market for the entire period that you are testing it in makes it all the more surprising that not more have been able to achieve [a consistent positive return],” Conway (pictured) said.
However, he noted that he is not surprised at the outcome as the sector is one that he has to ask many questions before coming to an investment decision.
“When we have researched this sector and have been looking for these types of funds, this is the sector we are the fussiest with because we recognise that there are a lot of funds that are being run to attract assets and are marketing fluff rather than proper attempts to run absolute return money well,” he said.
“Far too many funds have been launched, stick some nice targets on it that can be pigeonholed really easily by the intermediary community so get a load of money in and yet very few are able to do it.
“The crucial thing with all these types of funds is: can you identify the edge? What are they good at? Why do they deserve the label absolute return? Why do they think they can deliver a positive absolute return over the full market cycle?”
Conway added that one of the most common ‘edges’ is to employ short-selling strategies but this is often one of the hardest skills to master.
“When stocks fall, they do so very quickly so you have to be there at the right time at the beginning and be there at the right time at the end of the fall,” he said.
“Given that it is only happening over a short period your timing has to be absolutely excellent and what these results suggest is that actually a lot of these funds aren’t very good at it.”
Having considered the 50 funds that have consistently provided a positive return over a rolling three-year period, we then looked at the funds that have provided a positive return over a rolling one-year period.
Over the 36 monthly periods, only two funds have consistently provided a positive return over 12 months – Old Mutual Global Equity Absolute Return and Janus Henderson UK Absolute Return.
Conway uses three absolute return funds within his portfolio range with both of the above funds in his portfolios.
First up is Amadeo Alentorn, Ian Heslop and Mike Servent’s Old Mutual Global Equity Absolute Return which he said is a portfolio that is as close to a quant-driven fund as any he will invest in.
Rolling 1yr performance of fund over 3yrs
Source: FE Analytics
Over the last three years the $14.9bn fund has returned 17.52 per cent and over five years has made 31.15 per cent.
“This is all about their process,” he said. “In short we have a lot faith with the way they have constructed the portfolio and the way that their process works which is permanently evolving.
“They identify very specific factors that they believe will lead to strong performance but the crucial point about their process is it is very heavily research-driven and is backed up by continual academic research.”
He noted that in finance as soon as you identify something that works, it will stop working very quickly as it will become a crowded trade.
“If you create an algorithm that manages to make a positive return in all markets forever then you have solved investing and that is preposterous,” Conway said.
“So how on earth can a fund maintain a consistent performance? They are continually evolving the quantitative screening processes and the factors that are working all the time and staying ahead and that what the fund does very well.”
Old Mutual Global Equity Absolute Return has a clean ongoing charges figure (OCF) of 0.81 per cent.
The other fund to achieve the feat is Janus Henderson UK Absolute Return run by FE Alpha Managers Ben Wallace and Luke Newman.
“With this fund it is much more about the skill of the managers,” Conway explained. “That fund has a very large allocation to its tactical book which is a posh way of saying ‘short-term trading’.
Rolling 1yr performance of fund over 3yrs
Source: FE Analytics
“These are managers that live and breathe the portfolio, they are extremely alive to all possible opportunities to generate returns whether that be very short-term or more longer term.
“These are managers that we trust to react very quickly to events as they unfold and this is purely a case of backing the skill of two managers who are well equipped to run a fund like this.”
However, he said for funds where investors are backing the managers it is important for them to have a strong track record.
“If you look at their record during the global financial crisis it gives you confidence that they can generate returns in different types of markets,” he noted.
The £2.5bn fund has returned 9.58 per cent over the last three years and 30.09 per cent over five years. It has an OCF of 1.05 per cent.