One-third of absolute return funds post 10%-plus losses, but majority prove worth during sell-off

Funds with the absolute return moniker are supposed to protect investors’ capital; we take a look at how they fared during the past month’s heavy sell-off.

The reputation of absolute return funds has taken a battering over the past couple of years, but during the past month’s heavy market sell-off the majority of funds in the sector have proved their worth.

Number-crunching by Money Observer, using data from FE Analytics, has found that two-thirds of funds in the sector managed to keep losses below 10% from (21 February), when the sell-off started, to 23 March.

Over this period the average fund in the sector posted a loss of 8.8%. This, though, compares favourably to other low-risk fund sectors, with the Investment Association 0-35% equities share sector showing an average fund decline of 12%. Elsewhere, the volatility managed sector, a relatively new addition launched in 2017, put in a disappointing showing, as the average fund lost 18%. Funds in the sector, which was the most popular sector of all in terms of fund sales in November, target a specific risk or volatility outcome.

Overall, one third of absolute return funds managed to limit losses to less than 5%, and in some cases gains were made. Another one-third of the sector lost between 5% and 10%, while the remaining one-third posted losses in excess of 10%.

Six funds produced a positive return over the period: Wellington Global Total Return (11.7%), Argonaut Absolute Return (9.9%), Allianz Fixed Income Macro (4%), Insight Absolute Insight Currency (1.6%), Jupiter Absolute Return (1%) and Man GLG Alpha Select Alternative (1%).

But at the other end of the table, steep losses were made, with five funds in the sector posting a performance worse than the FTSE World index return, which lost 24.7% over the period. The five faltering funds are: Polar Capital UK Absolute Equity (-36.7%), Natixis H2O MultiReturns (-35.8%), GAM Star Global Rates (-28.7%), Liontrust GF European Strategic Equity (-27.9%) and LF Odey Absolute Return (-26.2%).

Fund managers running absolute return funds have a plethora of tools at their disposal to try and protect investors’ capital during more turbulent times. These include the ability to go short – betting against the fortunes of a company in order to make money if its share price falls. In addition, currency hedging techniques are often utilised by funds in the sector to protect or make money from currency swings. Other tools used include derivatives, buying futures and writing options.

The trouble with these extra bells and whistles is that when the wrong calls are made, losses are magnified, and this has happened during other notable market sell-offs such as the final three months of 2018 and following the EU referendum vote. Many investors have grown disillusioned with absolute return funds failing to deliver. The sector was bottom of the popularity stakes for eight months out of 12 in 2019.

This time around, though, so far at least, the majority of absolute return funds have delivered what they are supposed to be achieving – protecting capital and reducing risk for investors by fulling their role as diversifier in a portfolio.

Darius McDermott, managing director of FundCalibre, the fund ratings provider, comments: "With global markets down 25% (over the time period examined) and UK equities down more than 30%, the fact that the average absolute return fund is down 8% is pretty good. But what we have learnt in the past is that there is significant dispersion in this sector, given it is anything but like for like. For starters there are long-only, long/short, UK-centric, global, fixed interest, and numerous other types of funds all mixed together in the peer group.

"And there has been dispersion on the performance front during this downturn as well – with the best performer up about 11% and the worst performer falling 36.7%.”

McDermott says one thing that stands out is that global macro funds have generally held up well, including Allianz Fixed Income Macro (up 4%), JPM Global Macro (-1.4%) and Invesco Global Targeted Returns (-2.3%). He adds, however, that Natixis H20 Multi-Returns is a big exception to this.

He also notes that absolute return funds with a long/short equity approach have also generally held up well. “They are down a bit, but a lot less than markets. This is what we would expect. Janus Henderson UK Absolute Return (-3.4%) has done particularly well. Smith & Williamson Enterprise (-8.4%) and BlackRock UK Absolute Alpha (-8.1%) - funds we like - are not far behind.

"Fixed income funds have generally held up well too, with bonds doing a lot better than equities. Vontabel TwentyFour Absolute Return Credit (-3.4%), for example.

"Generally, I am happy to say, they have done their job at the critical moment. What we look for in this sector is a fund with a reasonable objective for a reasonable level of risk. What you don't want, when equities are going through the floor, is for your absolute return bucket to go through the floor too. So any fund that gives very high returns or very low returns we generally steer clear of, as they are too volatile for what is supposed to be a defensive part of the portfolio."

Adrian Lowcock, a chartered wealth manager at Willis Owen, agrees that in the main absolute return funds “did their job” during the past month’s sell-off, which of course could continue in the weeks and months ahead.

He says: “Absolute return funds are not supposed to beat a rising market; what they are meant to do is offer a steady and decent return, year in year out, and avoid losses. Whilst there are extreme strategies in the sector, overall the sector as a whole has actually delivered this.

“Investors should consider absolute return funds are part of the insurance element of their portfolio. They are not there to blow the lights out, but rather to the keep the lights on in a crisis. If they perform it means you can take some money from the fund and reinvest in the assets that have fallen in value.”