Absolute return funds have gone from being the poster boy of investments in the early 2010s to complete pariahs now.
Some £3 billion was withdrawn from the sector over the course of 2021, with 60 per cent of such funds showing negative returns.
So, what has gone wrong?
We are talking a type of fund that aims to deliver an absolute or ‘positive’ return, whatever happens in the stock markets, with lower volatility also part of the promise.
Back in 2015 and 2016, absolute return funds were the top-selling category.
This Is Money explains: “There are various approaches. Some funds hold shares, others opt for bonds, while some own a mix of the two.
“A long/short investment strategy is popular. The managers of such funds invest in shares they hope will rise in value, while ‘short-selling’ shares with poor prospects. This means that they borrow shares from their owners in order to sell them. They then buy back those shares (fingers crossed) at a lower price. Some managers also use derivatives, aspiring to lower risk by entering into a contract to buy shares or bonds at a future date and at a set price.”
The trouble is that many of these funds have disappointed. All allegedly down to a prolonged period of record-low interest rates and booming stock markets.
This Is Money cites as an example the Standard Life Global Absolute Return Strategy – known as ‘The Gars’. In its heyday of 2017-2018, it was the UK’s largest fund, containing almost £22 billion of investors’ money. It has subsequently dwindled to about one-tenth of this size. Other funds, dubbed the ‘sons of Gars’, have also shrunk. It seems the last straw for investors was many funds’ failure to provide a safe haven during the March 2020 stock market rout at the onset of the pandemic.
A lot of the issue is down to how they were marketed.
Investment companies were keen to portray them as an all-terrain solution, perfect for the cautious investor, an ideal home for their money. They talked up their targets, often couched as providing equity-like returns with bond-like volatility. Investors and advisers fell in line.
They are really designed to be a small part of a bigger portfolio alongside traditional assets. The aim was to provide a “hedge” for when there was high volatility in equity and bond markets, which should limit losses when markets fall. Unfortunately, a large number of these funds failed to do that as well.
So, do absolute return funds have a place in client portfolios?
In theory, yes. However, you would be hard pushed to find one in the current market that you would happily invest in. These are very complex portfolios with potential holdings in a vast range of assets. This makes them very difficult to manage. The fund manager needs such a huge range of skills and areas of expertise that it is likely that one or two of them would be sub-par. With so many strategies and assets to choose from, the competing merits become more and more difficult to measure.
One fund that does have a good, long term record is BNY Mellon Real Return. Yet this was launched in 1993, well before the idea of absolute return funds as they are now was born. It is really an old-fashioned multi-asset fund but with a very defensive approach.
It looks like, in their current format, absolute return funds are not going to return to favour any time soon. A traditional, diversified portfolio of equities, bonds and cash has provided better results and as much protection over the years.