We use the Lipper Leaders Scoring System to analyse the best performers in the IA Targeted Absolute Return sector.
Target Absolute Return, once drawing large amounts of cash with such star attractions as the ASI Global Absolute Return Strategies (GARS), has fallen out of fashion. The sector continued its poor run, with some of the heaviest outflows last year.
Note the Provisos
These funds should aim to deliver “positive returns in any market conditions”, although “returns are not guaranteed” and “may aim to achieve a return that is more demanding than a ‘greater than zero after fees objective’” over no more than three years.
That’s what the sector definition says, anyway. Note the provisos: “may”, for example. Your savings account does achieve a return greater than zero, with no “may” about it. People bought into Target Absolute Return for steady returns, or at least minimal losses, and the failure of the sector behemoths to deliver on this is likely behind the ongoing outflows.
Just how precarious this heavily hedged commitment is is illustrated by the changes in the top table since the Moneyfacts article on which this update is based was first published in November 2020 (see here, p26).
LF Odey Absolute Return Sterling Rtl Acc is at the top of the three-year returns to 31 January. Three months ago, it didn’t make the top 10. It also scores 1—the lowest—for both consistent return and capital preservation, and has the sector’s highest 12-month volatility.
There are echoes of last November, when the best performer over three years to the end of October was the FP Argonaut Absolute Return fund. It returned 47.4%—more than double that of the second-placed fund. Back then, we noted that the Argonaut fund had one of the higher 12-month volatilities in the sector, and a maximum five-year drawdown of 28.3%. Reflecting this, it had Lipper Leaders scores of 1 for both consistent return and capital preservation. Subsequently, over the three months to 31 January 2021, it has dropped by 10.4% and out of the top 10, showing that it pays to make use of Lipper scores.
Mixed Bag
That the sector is a melange of different strategies is testified by the fact that there are 17 more granular Lipper classifications within it. Given the variety, it’s notable that the two leaders over three years in October were both Alternative Long/Short Equity Europe, with one more in the top 10. With the diversity of approaches on offer, one might think that long/short equity has been the strategy to pick over three years—until, that is, you scroll down to the bottom of the three-year rankings and find an Alternative Long/Short Equity Global fund. The second worst was an Alternative Long/Short Equity UK fund.
Fast-forwarding to 31 January, the first, second, and fourth top performers over three years are Absolute Return GBP High, with Absolute Return GBP Medium taking a further three of the top 10 places.
Chart 1: IA Target Absolute Return sector, three-year total return (%)
All data as of January 31, 2021; Calculations in GBP
Source: Refinitiv Lipper
The Argonaut fund also has the largest total expense ratio. Given its performance over one and three years, I would imagine its investors are happy to pay it. But there’s no such thing as “reassuringly expensive” in the fund world, and the second-highest charging fund languishes way down the bottom of our table, with a total expense ratio of just above 2% and a three-year return of negative 2.5%. At that point, charges don’t just matter—they gnaw.
You probably don’t buy these funds to shoot the lights out, so the Odey and Argonaut funds are like sending out for margherita pizza and a guy on a scooter turns up with lobster thermidor. Assuming you’re not allergic to seafood.
Only two funds in the table—Threadneedle Dynamic Real Return and TMI Diversified Assets GBP— with a Lipper ‘Absolute Return GBP Medium’ and ‘High’ classifications—score 5 for both consistent return and capital preservation. They also have below-average TERs for the sector. That seems more in tune with the intent of Target Absolute Return. But it’s a problematic category and the shine has come off, at least for now.
Table 1: Lipper Leaders – Top-performing IA Targeted Absolute Return funds over three years, with Lipper Leader five-year scores
All data as of January 31, 2021; Calculations in GBP, all funds with a minimum five-year history
Source: Refinitiv Lipper
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