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The best absolute return funds for consistent gains since the financial crisis

19 January 2018

FE Trustnet explores the funds that have made the most consistent returns in the IA Targeted Absolute Return sector since 2009.

By Jonathan Jones,

Reporter, FE Trustnet

The best absolute return fund would have protected investors 86 per cent of the time in the nine years since markets rallied following the global financial crisis, according to the latest FE Trustnet study.

Commonly misconceived as unable to lose money due to the use of the word ‘absolute’, funds in the IA Targeted Absolute Return sector have on average made positive returns in 77 months over the last nine years with 31 negative periods.

Only one fund in the sector has seen more negative monthly periods than positive ones over the past nine years, as the below table shows.

Table of fund monthly positive and negative periods over 9yrs

 

Source: FE Analytics

Adrian Lowcock, investment director at Architas, said the term ‘absolute return’ is misleading for investors and should be viewed as any other sector – it has the potential to rise as well as fall.

“As with any strategy or investment, the potential to make a gain or a loss is based entirely on getting your views right often enough but no one person or team is infallible,” he said. “You are going to have a negative performance at some point.”

He argued that an absolute return fund should target some diversification benefits rather than guaranteeing total absolute returns over arbitrary periods.

When equity markets are falling, an absolute fund should be performing with greater stability and more consistent returns over the medium term, according to Lowcock.



As such, the role of an absolute return fund should be to comfortably beat cash as well as to make sure it does not deliver lumpy performance.

It is this philosophy that has made the asset class extremely popular in recent years as equity markets have appeared to be nearing the top and bond yields near the bottom.

“This expectation of stable returns and diversification makes them popular with investors as many do not want to take the levels of risk associated with equity markets,” Lowcock said.

“They also became popular due to some measure of success during the global financial crisis and particularly rose in popularity as a response to the uncertainty it created.

“The key though is to shop around as many of these funds do different things and some can be quite risky and punchy in their objectives. So, do your research.”

The most consistent fund of the 25 eligible in the IA Targeted Absolute Return sector since the financial crisis is the four FE Crown-rated, £175m Premier Multi-Asset Absolute Return run by David Hambidge, Ian ReesDavid Thornton and Simon Evan-Cook.

The fund is managed with the aim of delivering positive returns over rolling three-year periods, in any market conditions, although returns are not guaranteed.

Its emphasis is on trying to deliver steady capital returns with lower volatility than equities and aims not to be reliant on rising stock markets to deliver a positive return.

It is currently 42.4 per cent weighted to alternatives (including other absolute return strategies), 27.9 per cent in conservative equity strategies, 16.8 per cent cash and the remainder held in bonds.

The portfolio, which has a clean ongoing charges figure (OCF) of 1.14 per cent, has returned 69.91 per cent over the last nine years, which includes the financial crisis.

Performance of fund vs sector and benchmark over 9yrs

 

Source: FE Analytics

During this period it has had 85 positive monthly periods with 23 negative periods, a maximum monthly drawdown – the most an investor could lose if buying at the top and selling at the bottom – of 3.8 per cent and volatility of 4.19 per cent.

Second on our list is the £1.9bn Newton Global Dynamic Bond fund run by Paul Brain which has six fewer positive months than the Premier fund.



It has a yield of 2.95 per cent and an OCF of 0.81 per cent has returned 63.03 per cent over the period. The fund has done so with a maximum drawdown of 4.62 per cent and volatility of 3.94 per cent.

Our third fund is the five crown-rated SVS Church House Tenax Absolute Return Strategies fund run by FE Alpha Manager Jeremy Wharton and James Mahon, which has experienced 78 positive monthly periods.

The £178m has returned 63.42 per cent over nine years, with a maximum drawdown of 4.64 per cent and volatility of 3.28 per cent.

Looking over a more recent timeframe, the relative success of absolute return funds has fallen. Over five years, the sector experiencing 41 positive monthly periods and 19 negative periods.

The IA Targeted Absolute Return sector has made a positive monthly return 71.2 per cent of the time over the last nine years but this falls to 68.3 per cent of the time over five years.

At a fund level, Premier Multi-Asset Absolute Return remains the most consistent performer but it drops from a positive return in 80 per cent of months over nine years to just 70 per cent over five years.

Table of fund monthly positive and negative periods over 5yrs

 

Source: FE Analytics

Over this period the second-most consistent fund is the £51.3m Tideway Real Return, which has produced 44 positive periods and 16 negative months.

The fund has returned 17.69 per cent over the last half-decade with a maximum drawdown of 8.2 per cent and volatility of 4.34 per cent.

Threadneedle Credit Opportunities run by Barrie Whitman has also risen for 44 months with 16 negative periods.

The portfolio has made 13.33 per cent over the last five years and has done so with a maximum drawdown of 3.33 per cent and volatility of 1.95 per cent.

Conversely, over this period four funds – Aberdeen Target Return Bond, GAM Star Discretionary FXThreadneedle Absolute Return Bond and Absolute Insight Currency – have had more negative periods than positive months.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.