by Jake Moeller.
Jake Moeller looks at the 2015 performance of funds in the IA Targeted Absolute Return sector.
Absolute return funds generally seek to generate a specified return over a given period. This can be an amount over a rate of interest such as Libor or inflation metric. Often the given period is stated as three years but can be vaguer: “market cycle” or another loosely defined rolling period.
Industry sector classification schemes allow investors to compare like with like for many investments, but absolute return can be harder to aggregate. The UK Investment Association (IA) for example, has seven qualifications to the definition of its Targeted Absolute Return Fund sector and includes a rolling 12-month monitoring analysis “on the expectation there is a wide expectation among consumers and advisers that funds in the Targeted Absolute Return sector will aim to produce positive returns after twelve months.”
Table 1. Five-Year Performance of IA Targeted Absolute Return Sector v U.K. RPI+3% and IA U.K. All Companies (to September 30, 2015 in GBP)
Investors who have suffered through the volatility of 2015 and the recent “Black Monday” correction, may be attracted to the concept of an absolute return. However, the lack of homogeneity in this area is evident, with the sector containing corporate bond funds, equity long/short funds, equity long funds with index short strategies, diversified multi-asset funds and multi-asset long-only funds. Indeed, the IA classification of absolute return contains funds from over 20 of the more specifically defined Lipper Global Classifications. This makes comparisons difficult. And while the “expectation” the IA refers to above is valid, these funds are invariably market linked and negative returns are possible.
There is no doubting the popularity of these funds. Currently there sits around £53 billion overall in the sector in the U.K., with some £450 million of estimated net inflows for September alone. However, the variation of returns is considerable. The best performing fund year-to-date, City Financial Absolute Equity A Acc has returned 26.9% to September 30, 2015 while the worst performing fund over the same period, Henderson Credit Alpha Y Gross Acc Hdg has returned -5.7%. Over this period, more than 30% of all the funds in the Targeted Absolute Return sector have returned a negative amount.
Table 2. Best and Worst Performing Funds in IA Targeted Absolute Return Sector Year to date September 30, 2015
For the longer-term, absolute figures appear better: over three years to September 30, 2015, only two funds in the sector have returned a negative amount and over five years to the same date, only a single fund has returned a negative amount. However, this doesn’t mean investors have benefited from stellar comparative performance. Over the three years to September 30, 2015, only 15% of absolute return funds have beaten a U.K. RPI +3% benchmark. Over five years, this increases to 21%.
Investors need to understand thoroughly what strategy their absolute return fund is using. Many funds are esoteric with somewhat vague objectives and the sector is far from homogeneous. Investors, who are sold on the concept of positive returns in all markets, may not actually get this and although many funds in this classification do exhibit lower volatility than other market linked funds, the opportunity cost can be high.
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This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.