Fund Research & Insights
Absolute Return Funds Fail to Deliver Despite £6bn Inflows

Investors poured millions of pounds into targeted absolute return funds despite their negative returns in the first seven months of 2016, according to Morningstar data.

Absolute return funds failed to deliver on their promise to generate positive returns in all market conditions this year – challenged by the market turmoil.

This is not the first time these funds have not delivered on their moniker promise. In February 2013 the Investment Association undertook a review of the sector and subsequently changed the name of the sector to ‘Targeted Absolute Return’, in order to clarify that a positive return was a target rather than a guarantee.

Targeted Absolute Return funds, which are a type of multi-strategy, or multi-asset fund, saw £6 billion inflows from January to July 2016, showing investors’ confidence in the sector.

A recent survey from Baring Asset Management revealed ahead of the EU Referendum, 27% of financial advisers were encouraging investment in multi asset products to combat stock market volatility.

Marino Valensise, head of multi asset and income at Barings said, “Given the market uncertainty, it is good to see a high percentage of IFAs who are recommending clients increase exposure to multi asset products, which can limit downside risks while making the most of growth opportunities.”

5 Absolute Return Funds Fail to Deliver

The Aviva Investors Multi-Strategy Targeted Return fund lost investors 1.3% in the first seven month of the year, however the fund saw more than £1.2 billion inflows over the same period of time.

“While our multi-strategy funds are designed to perform in all market conditions, there will be periods where returns are lower than others,” a spokesperson from Aviva Investors said, adding that as the fund is designed to meet a specific long-term investment objective, they expect the fund would fully deliver the outcome expected over a three-year period.

Morningstar fund analyst Randal Goldsmith awarded the fund a Neutral rating, saying: “At this stage, it is too early for us to have full conviction, but the strong start and firmwide support for the strategy bodes well.”

Henderson UK Absolute Return, the Bronze Rated fund, aims to provide consistently positive returns regardless of market conditions by taking long and short positions in UK equities. It recorded £656 million inflows from January to July 2016; however it delivered negative returns of 0.2% at the same period. Looking at five-year annualised figures, the has a positive annual return of 6.5% and it returned 16.4% in 2013 alone.

Another Bronze Rated fund Standard Life Investments Global Absolute Return Strategies is also backed by investors with £596 million inflows in the first half of the year. However, after a disappointing first quarter of 2016, the fund is below its cash plus 5% target over three years, Goldsmith said.

“That stems from some ideas that did not did not work in the quarter, rather than more fundamental issues. We still consider that the robust process, with strength in risk management, outweighs capacity and team turnover concerns,” Goldsmith said.

A spokesperson from Standard Life Investments responded saying: “The disappointing negative return for GARS reflects that our choice of longer term investment positions has been at odds with shorter term market behaviour. Importantly however, despite some disappointing strategy selections, GARS has been performing as you would expect from a risk perspective with low levels of volatility relative to risk assets.”

The Threadneedle UK Absolute Alpha fund saw £138 million inflows in the first seven months of the year. The fund aims to achieve an absolute return, irrespective of market conditions over the long time, but it lost 3.8% in the first seven month of the year. The fund has had strong performance in the past five years with a 5% annualised return.

“While recent volatility has affected short term performance, the long term performance remains strong with first quartile returns over three and five years,” a spokesperson from Threadneedle responded.

Kames UK Equity Absolute Return, the Bronze Rated fund, aims to achieve a positive return over a 12-month period in all market conditions. However, in the first seven months of this year, it lost 4.2%. But the fund saw £80 million inflows over the same period.

David Griffiths, co-manager of the fund said the negative return posted so far in 2016 comes after five consecutive positive years beginning in 2010.

“We are clear that Absolute Return funds are not a replacement for cash. These funds take investment risk and therefore will inevitably produce periods of negative returns. The Kames UK Equity Absolute Return fund is intended to be part of a diversified portfolio: an important feature of the product is that it is uncorrelated to equity markets and indeed other major asset classes,” Griffiths added.

Absolute Return Funds with Positive Returns

However, there are absolute return funds that have successfully delivered positive returns in the face of market uncertainty this year. Invesco Perpetual Global Targeted Returns, the Bronze Rated fund, is up 2.9% year to date and has seen £1.7 billion inflows.

The JP Morgan Global Macro Opportunities fund is up slightly – delivering a 0.8% positive return with £482 million inflows over the same period.

Source MorningstarKaren Kwok | 18/08/2016

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