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May 15, 2024

Wednesday Investment Wisdom: Absolute Return vs. Total Return Investment Strategies

by Detlef Glow.

Total return and absolute return are two frequently used terms in the investment world. But what is the difference between the underlying investment strategies?

Total Return investing is an investment strategy which is mainly used for bond investments. This strategy got famous when Bill Gross started to implement total return strategies in his portfolios in the 1980s.

As opposed to a traditional bond investment where the investors clip steady interest payments and hold their bonds until they mature, a total return strategy is more active as the manager tries to optimize the portfolio structure to gather returns from all sources, including duration, credit risk, and volatility. As a result of such a strategy the respective portfolio may face periods of losses during negative market environments. A total return investor, therefore, might be more focused on the overall capital gains of the portfolio than the realized interest rate payments over a given period of time. Even as total return strategies are mainly used for bond portfolios, this strategy can also be used for equity or mixed-assets portfolios. A sub-type of total return strategies are the so-called optimal income strategies which are mainly used for mixed-/multi-assets portfolios.

Nevertheless, total return strategies should not be mixed-up with absolute return strategies since absolute return strategies try to generate a positive return in all market environments. To achieve this goal, absolute return strategies use securities and derivative instruments. In some cases absolute return strategies use only (complex) derivative structures to achieve their investment goal.

The main difference between the two strategies can be seen in the promised risk/return profile. While total return funds aim to generate as much returns as possible from all eligible sources, absolute return funds try to achieve positive returns in all market environments. This difference is also reflected in the benchmarks of most products. Total return funds normally use a market benchmark and compare their performance relative to their benchmark, while absolute return funds do normally use an absolute benchmark (money market + xy%, etc.) to describe their investment goal. In addition to this, absolute return funds often mention the time horizon over which they want to achieve their absolute return target.

That said, absolute return funds, in general, do not guarantee the positive outcome of their strategies, which means that investors may face losses despite investing in a fund with an absolute return strategy.

 

This article is for information purposes only and does not constitute any investment advice.

The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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