Why investors are heavily selling out of this fund sector

Around £5 billion has been withdrawn over the past year. Here’s why investors are voting with their feet.

Investors are increasingly growing disillusioned with absolute return funds, with just under £5 billion withdrawn from the fund sector over the past year.

Investment Association data shows that over the 12-month period (to the end of November 2020) the sector has recorded an outflow of £4.7 billion, with more money withdrawn than invested in the last 11 months out of 12.

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. This has damaged the reputation of the sector, and as a result investors have been voting with their feet. 

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During the stock-market turbulence in the first quarter of 2020, however, the sector did not do too badly. Data from FE Analytics shows the average fund in the Investment Association (IA) Targeted Absolute Return sector lost 8.8% from 21 February 2020, when the sell-off started, to 23 March 2020. This compared favourably to the lowest-risk multi-asset fund sector, with the IA Mixed Investments 0-35% Shares sector showing an average fund decline of 12%.

For 2020 as a whole, the IA Targeted Absolute Return sector returned 2.6% versus a gain of 3.9% for the IA 0-35% Equities Shares sector.

But looking at the range of returns for the two sectors, the difference is stark, which highlights that the absolute return sector is not for the faint-hearted. The top-performing fund in the IA Targeted Absolute Return sector is LF Odey Absolute Return, up 29.1%, while the worst performer, Jupiter Absolute Return, lost 17.3%. The latter fund’s manager, James Clunie, stepped down in December. Clunie had held a short position in Tesla (NASDAQ:TSLA) for a considerable period of time, which ultimately backfired.

Of the 108 funds in the sector,  26 lost money in 2020, that’s 24% of the peer group.

In contrast, the best-performing fund in the IA Mixed Investments 0-35% Shares sector was up 10.6%, while the worst performer lost 9.8%. Top of the sector was Royal London Sustainable Managed Growth Trust, with VT Garraway Multi Asset Diversified the laggard. Of the 57 funds in the sector, seven lost money in 2020, which works out at 12%.

Therefore, the IA Mixed Investments 0-35% Shares sector is a much better hunting ground to find defensively focused funds that aim to protect capital, as well as grow it. Investors who are willing to take more equity risk could consider funds in the IA Mixed Investments 20-60% Shares sector or the IA Mixed Investments 40-85% Shares sector.

Two new ii Super 60 options 

Interactive investor recently added two multi-asset funds to its Super 60 list; Capital Gearing (LSE: CGT) and Fidelity Multi-Asset Income.

Capital Gearing, managed by Peter Spiller, has a defensive stance and high levels of diversification. It invests in shares (normally through investment trusts), bonds and property, with small holdings in infrastructure, gold and cash.

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Fidelity Multi-Asset Income mainly invests in other Fidelity funds. It sits in the Investment Association’s 0-35% Shares sector, meaning that it can hold a maximum of 35% in shares. The strategy targets a sustainable yield of 4% to 6% a year.