Absolute return funds are a particular class of fund whose managers are given greater flexibility in what they invest in. As well as buying equities, index trackers, ETFs and bonds like normal funds, absolute return fund managers are able to invest in physical assets, like warehouses or power plants, as well as take ‘short’ positions on assets, betting that their value will fall.
The promise of this greater flexibility is the absolute return funds are less tied to the fortunes of international stock markets and are able to deliver positive returns even during a downturn. They are widely characterised, at least in theory, as being conservative in their investments and their ability to go short or invest in assets not tied directly to the volatility of financial markets means they are often dubbed ‘safe haven’ investments.
Many of those investing online turn to absolute return funds in an effort to protect their wealth when they see trouble ahead for financial markets. As such, it is perhaps no surprise that investors have funnelled over £7 billion into absolute return funds over the past three years as concerns mounted that the current bull cycle has matured and will soon turn. The bad news is that recent research carried out by AJ Bell, the online investments platform, indicates that, on average, these funds prove to be anything but a ‘safe haven’. Rather, they demonstrate often high levels of volatility and well over half, 64, of the 105 absolute returns funds covered by the research, have delivered a positive return over the past 3 years.
Of course, other than last year, financial markets have performed well over those 3 years and absolute returns funds come into their own during a bear market. However, they are still supposed to, at least in theory, deliver a positive return during the good times also. The idea is simply that their investment approach smooths returns out more evenly over equities bear and bull markets.
Unfortunately, AJ Bell’s research shows that most of those available to Brits investing online don’t achieve that aim. Only 59 of the 105 absolute returns funds appraised managed to beat the typical 0.6% interest easy-access savings accounts offer. Four registered losses every year over the three, including those of big money manager brands Schroder and Threadneedle.
The study also showed a huge disparity in the results of different absolute returns funds, in contrast to the sector’s reputation for ‘slow and steady’ performance of investments. The Polar Capital Absolute Equity equity fund returned a whopping 57.2% at one end of the scale and at the other the Argonaut Absolute Return lost 23%.
One of the factors highlighted as impacting on the recent performance of absolute return funds is the environment of ultra-low interest rates. This has limited their opportunities for profitable trading as interest rates moving up and down open up many more opportunities. Many have instead been sitting on large sums of cash, adopting a conservative approach rather than risk making mistakes trading.
However, the research highlights the danger of investors making presumptions around the level of risk a broad class of investments is reputed to hold. Markets change and performance with them when it rests on a set of historical factors that no longer hold true. Right now, absolute return funds look far more high risk and volatile than many other classes, despite their ‘safe haven’ reputation.