September 3, 2019

UK Lipper Leaders: Looking at Targeted Absolute Return Funds–July 2019

by Jake Moeller.

Do you remember when Targeted Absolute Return (TAR) funds were the darling of the U.K. fund industry? Lipper estimates revealed that in 2016, there were nearly £6 billion of net inflows into this classification, 2017 saw a further £2.6 billion and 2018, £1.6 billion. However, in the year to July 2019, there have been nearly £2.6 billion of outflows.

TAR funds are a nebulous collection and pose some potential pitfalls for the unwary investor. Many will be drawn to the classification to dampen volatility, some to the attraction of positive returns in all types of markets, others even as a cash proxy.

TAR funds form a very broad church

To illustrate the diversity here there are 26 of the more granular Lipper fund classifications within the Investment Association (IA) classification. These include mixed asset funds, global bond funds, multi-strategy vehicles and long/ short vehicles to name but a few.

Exhibit One. Top performing IA Targeted Absolute Return Funds ranked over 3-years (with 5-year history – to July 2019)

Source: Lipper by Refinitiv. Lipper for Investment Management. Past returns are not a reliable indicator of future returns.

Source: Lipper by Refinitiv. Lipper for Investment Management. Past returns are not a reliable indicator of future returns.

The IA themselves recognise the potential variation in product strategy and complexity by qualifying their definition of the classification with cautious footnotes and the incorporation of a twelve-month screen. This acknowledges the “wide expectation” among consumers and advisers that funds in the TAR sector will aim to produce positive returns after twelve months.

Many TAR funds have not met investor expectations

2018 was a tough year for all markets, the IA TAR classification returned -2.7% which is better than the Lipper Global Equity return of -6.8% (in GBP) over the same period. Year-to-July 2019 as markets have rallied, 19.4% (global equities) v 3.5% (TAR) may not be quite as satisfying an outcome. Therefore, it is likely the failure of many of these funds to meet the expectations of their investors that has caused their fall in popularity.

Looking at our table, we can see considerable performance variation – consider the extremes just in the three-month data of our table. This reflects portfolio composition differences. For investors grappling with this broad church of funds, Lipper Leader scores (based on the granular Lipper Global Classifications) can offer some assistance.

Preservation of capital is key

For investors attracted to this classification for the preservation of capital, the Preservation score is obviously most significant and funds with a good score here have shown they have protected capital against their peers over the last five years.

However, for investors who are likely to suffer from “market rally envy”, the combination of a strong Preservation and Total Return scores implies that not only is the fund meeting the qualifications set by the IA in this classification, they have not forgone upside whilst doing so. Throw in a good Consistent Return score and you are really in the sweet spot.

Be sure to lift the bonnet

The IA TAR sector requires considerable analysis. It is far from a homogeneous sector and this is reflected by the considerable variation we see in performance outcomes. Investors really need to lift the bonnet here. There are some great funds in the classification who have stood the test of time and delivered what investors might expect. Plenty too which haven’t.


Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

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. Past performance is no indicator of future performance.

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