This is not the only area where the sector faces issues. Its flagship product – in terms of name and size – has suffered. The Standard Life Investments Global Absolute Return Strategies (Gars) fund, whose UK-domiciled version has £23bn in assets, has disappointed investors. The strategy, targeting 6-month Libor plus 5 per cent on a rolling three-year period, has seen outflows hit £4bn in the past 12 months.
Much of this has been down to underperformance. The fund aimed for a return of 18 per cent in the past three years, but has barely provided more than 2 per cent.
The strategy has been mimicked by Invesco Perpetual and Aviva Investors, as members of the once renowned team depart to launch replica products. Flows into these funds have been strong, with Invesco Perpetual’s fund more than doubling in size, and Aviva Investors’ increasing fivefold, in the past 18 months.
Even these products have not been free of criticism, however.
Both Aviva Investors and Invesco Perpetual funds are set to underperform three-year targets, with the former recently losing team members and the latter hit by a downgrade from Morningstar following concerns over its team’s integration.
Taha Lokhandwala is deputy editor of Investment Adviser
Expert View: Fund selection
Rory McPherson, head of investment strategy at Psigma, says close monitoring of absolute return strategies is vital:
“Absolute return is a massive catch-all sector and requires each fund being considered on a case-by-case basis, and it goes without saying that close monitoring is key.
“We like absolute return funds that offer us something that traditional assets don’t and help improve the mix of the portfolios we run. We favour managers who are benchmarked to cash and have very low correlation to both bonds and equities.
“We own the Jupiter Absolute Return fund, a long/short equity fund run by James Clunie. This isn’t particularly differentiating in itself, but the key reason we like it is its ability to use protection strategies to do well in choppy markets; when we need it most. We also like the BNY Mellon Absolute Insight fund, which helps dampen risk of other assets and grind out modest positive returns; playing the role of core bonds without the downside risk.
“There are several very good diversified growth funds out there that would also fall into the absolute return bucket, but we don’t own them. These funds can change their stripes very quickly, which can make blending them with other assets a very challenging job.”
Expert View: Absolute return fund performance
Gavin Haynes, managing director of Whitechurch Securities, says it is a tough time to deliver big returns:
“It is proving a difficult time for this sector. With equity and bond markets having rallied in tandem since 2009, absolute return funds have lagged traditional strategies. With markets continuing to trade at elevated levels and low volatility, it is proving to be a tough environment to provide competitive returns. The sector has also recently come under criticism from the FCA over its use of inappropriate benchmarks and performance fees.
