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Rob Burdett: How to avoid ‘mis-buying’ an absolute return fund

04 September 2017

The BMO multi-manager argues that many investors are buying absolute return funds for the wrong reasons and need to change how they approach the sector.

By Gary Jackson,

Editor, FE Trustnet

Investors are at risk of ‘mis-buying’ absolute return funds if they think of them as silver bullets that will protect their portfolios from the worst the market can throw at them and never lose money, according to BMO Global Asset Management’s Rob Burdett.

Targeted absolute return funds have become a favourite with investors in recent years, indeed the IA Targeted Absolute Return is consistently among the top five best-selling sectors in the Investment Association’s monthly inflows figures. Quite often, the sector is the first or second most popular by inflows as investors attempt to hedge portfolios in an environment of high valuations and general nervousness.

Burdett (pictured), who is co-head of multi-manager with Gary Potter at BMO Global Asset Management, believes that many of these funds are being bought by investors for the wrong reasons.

“The sector didn’t exist 10 years ago and today it’s one of the biggest sellers,” he said.

“I don’t think people are mis-sold absolute return funds, I think they mis-buy them. People buy them as a silver bullet – the fund that never goes down – but in reality there isn’t one of those, in my opinion. Some investors hear the word ‘absolute’ and think it’s a guarantee.”

Performance of funds vs sector over 1yr

 

Source: FE Analytics

The growth of the IA Targeted Absolute Return sector has been driven the ‘Fab Five’ of Standard Life Investments Global Absolute Return Strategies (GARS), Newton Real Return, Invesco Perpetual Global Targeted Returns, Aviva Investors Multi Strategy Target Return and Aviva Investors Multi Strategy Target Income, the multi-manager noted.

“In fact, most of the largest 30 absolute return funds were all below average over the 12 months to the end of July. Most of them are in the fourth quartile and a fair proportion are in the bottom decile,” he added.

In order to avoid mis-buying an absolute return fund, Burdett said investors need to treat them more like any other investment product and gain an in-depth understanding of how they work before committing money to them.

“Like any fund, success should be down to the application of skill, a thesis or a methodology,” he said.


“This means you need to know about the people who are managing it, if it’s done on more traditional lines. If it’s a quant-based approach or some other method, you need to know about the process behind it, how it’s implemented and how it’s updated,” the multi-manager explained.

“It’s all about getting to know the architects behind the fund. It’s still a judgement game of the people and how good they are. With absolute return, you will still get some that are good and some that are bad, just like with other sectors.”

Burdett and Potter, who run portfolios such as F&C MM Navigator Moderate, are currently using two absolute return funds in their range: Old Mutual UK Specialist Equity and Majedie Tortoise.

Performance of funds vs sector over 1yrs

 

Source: FE Analytics

Old Mutual UK Specialist Equity is based on a Cayman Islands-based hedge fund strategy and has been managed by Tim Service since launch around 18 months ago.

“We helped seed it and it’s been brilliant since – better than we originally thought, to be honest. The fund is structurally more ‘absolute return’ than many funds in the sector,” Burdett said.

“It’s built around the team’s small- and mid-cap skills but it’s trying to be as low beta as possible. Quite often it will have shorts on the mid-cap index then be long on specific stocks to remove market risks and just add value through stock picking. It can also take shorts on individual stocks.”

Majedie Tortoise, which is managed by Matthew Smith and Tom Morris, has had a more challenging time over the past year but Burdett said it has performed well over the long run and is worth maintaining a position in.

“The team has become quite bearish but we know that and we have some off-setting positions,” he added. “But if we’re very wrong about markets or something terrible drops out of the clear blue sky, this is a fund that would protect us to a greater degree than most other things in our portfolio.”


Burdett also questioned whether most investors actually need an absolute fund and pointed out that many of the more prominent members of the sector are in risk band 4 – the same as many funds in the IA Mixed Investment 20-60% Shares peer group.

Over the past five years, the average IA Targeted Absolute Return fund has made an 18.72 per cent total return with annualised volatility of 1.81 per cent. The average IA Mixed Investment 20-60% Shares member is up 37.98 per cent with volatility of 5.08 per cent.

“The multi-asset sector return has made double absolute return sector over the past five years, but it’s absolute return funds are the ones that have doubled their inflows. Investors have missed out but they’ve had a smoother ride,” he said.

Performance of funds and sectors over 2yrs

 

Source: FE Analytics

“However, the sector has been virtually flat for two years and GARS, although it has down a great job in the long run and helped you most out when you really needed it, is negative and has underperformed in the past two years,” Burdett concluded.

“GARS has had £10bn out over this period and I think that is a bit harsh. It’s only down a little bit and all funds go down. This is likely because people don’t understand it or bought it for other reasons.

“But my view is that people can understand a multi-asset fund like ours – it can cushion you but might go down. Investors get that and don’t panic when it does go down.”

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