Absolute Return Funds
Absolute Return Funds

Absolute Return Funds

Investing for all market conditions?

It’s a brilliant concept isn’t it – investing in a fund that can provide a positive return regardless of the prevailing market conditions. If that is the case, why isn’t everyone investing in this area?  Primarily this is due to the complex nature of Absolute Return Funds generally. After all, as Warren Buffett said “never invest in something you don’t understand”.

A history lesson

Many of us will be familiar with the phrase “hedge your bets” not surprisingly as it has been in use since the 1600s. Back then, the phrase had a distinctly agricultural link as it referred to an actual hedge that fenced off a piece of land with the aim that the risk of losing the land to other “interested parties” (the law was not as robust in those days!) would be reduced . Today, when you “hedge your bets” the result should be that you protect yourself against loss by supporting more than one possible result.

Hedge Funds

The concept of ‘hedging’ is used today in all walks of life. Over the past twenty years investors will have become increasingly aware of the existence of “Hedge Funds” which are often referred to as Absolute Return Funds. Hedge Funds have been part of the investment landscape for over 50 years and although they do include some high risk investments, the original concept was to reduce risk through ‘hedging’ bets so that investors were less exposed to market volatility. They were however, generally only available to wealthy and investment savvy individuals or, more recently, pension funds and were considered inaccessible to retail investors.

In 2004 a regulatory change permitted fund managers to adopt similar strategies that the Hedge Fund Managers had been employing for a number of years. The result was that a number of Absolute Return Funds were launched leading to the establishment of the IMA Absolute Return sector in 2008.

How has the sector performed?

As an investor looking from the outside in the perception of an Absolute Return Fund would be one of consistency with not too much excitement along the way – a boring fund that you could rely on to act as a foundation for a portfolio. Unfortunately, this could not be further from the truth as many Absolute Return Funds are extremely volatile. As with any investment fund the degree of risk that a manager can build into their stock selection process is dependent upon the investment mandate they have. Some have a more swashbuckling approach, with the resulting performance more akin to a fund that invests primarily in shares. There are others that take a more conservative approach and some that fall somewhere in between.

In our view, Absolute Return funds are there to provide stability and consistency for an investor – they are certainly marketed in that way! The fund we have selected is on our preferred list of funds and certainly performs in a way that we feel Absolute Return Funds should do.

Fund Facts - Jupiter Absolute Return Fund

Looking at the performance chart in isolation any investor would question the logic of investing in a fund that had performed so poorly for a number of years. In fact performance was so poor following the fund launch back in 2009 that investors actually lost money – not what you would expect from an Absolute Return Fund when investment markets generally were rallying following the financial crisis a year earlier.

Performance Chart

Following this period of under performance in 2013 James Clunie was brought in to assume stewardship of the fund. James had worked previously at Murray Johnstone (Head of Asset Allocation); Aberdeen Asset Management (Head of Global Equities) and Scottish Widows Investment Partnership (Investment Director of Equities) gaining the experience necessary to manage absolute return style funds.

Upon arrival James immediately set about restructuring the fund following which performance began to slowly improve to a point where returns are now above the long term average for the sector. The fund has a very simple target of beating returns in excess of cash which at the moment is not particularly challenging bearing in mind the low returns currently being offered for cash based investments. However, from the graph it is clear that James is exceeding his targets by quite a considerable margin and, unlike other similar funds in the sector, he is doing this without taking too much risk.

Regional Allocation

Typically James has around 70 holdings in his portfolio. Approximately 70% are invested for a period of 2-3 years with the other 30% invested in areas where James feels there is the potential for short term gains that will benefit the fund.  There is also the flexibility to invest in other types of assets such as gilts and Exchange Traded Funds (ETF’s) should the opportunity arise. Although the mandate of the fund allows holdings to be drawn from around the world, James tends to be biased in favour of the UK.

Unlike many absolute return funds, this fund is keenly priced with assets still at a manageable level and no performance fee. As such we believe that it is a good option for those looking for a relatively cautious means of diversifying their portfolio.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in collectives should only be made after reading the Key Investor Information Document, Supplemental Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.