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Targeted Absolute Return: All is not as it seems

Posted by: Sam Lees

 

There are a variety of funds that sit within the “Targeted Absolute Return” sector, many following very different strategies.  The name suggests low risk, and even implies no risk – it certainly suggests you will make money.  But all is not as it appears, and you should be wary if you hold, or are considering, funds in this sector.

The funds in this sector have received a lot of bad press because of poor recent performance and their apparent inability to provide absolute returns in all market conditions.  In our review of 2016, the Targeted Absolute Return sector gave us the worst performing fund and was also the worst performing sector over the year.

The sector name suggests low risk, and even implies no risk.  But investors should be aware that many funds in the sector only target positive returns over a set period (12 months, 5 years etc.), and make no guarantees.  So you should expect periods of negative performance but these shouldn’t be significant or sustained.  

In our view the funds in this sector should prioritise limiting falls in their price, and aim to provide a return, in most years, at a decent margin above building society interest rates.  Investors shouldn’t be expecting the much higher stock market-style returns, as this indicates the fund can fall sharply as well as rise sharply.

What Goes Up...

We looked at the best and worst months of performance for all the funds in the sector greater than £50m in size with performance going back to January 2011.  Of these, 3 funds had positive months of performance that exceeded that of the FTSE 100.  

Normally, this would be great news – but not if you’re after a “lower risk” fund and not if the value can fall just as quickly.  These same 3 funds also had worst months that exceeded that of the FTSE (table 1).

We also looked at returns of these funds over 12-month periods since January 2011 and saw a similar pattern: the largest 12-month returns were around 50% greater than the FTSE.   While the worst 12-month periods were around 2.5 times worse (table 2).

These returns do make them outliers compared to the majority of funds in the Targeted Absolute Return sector.  This doesn’t mean these funds are bad.  It simply means they are in a wholly inappropriate sector, and some investors dazzled by recent performance might buy the funds without appreciating their true nature.

That’s More Like It...

Funds that are, in our view, more genuine absolute return funds are ones like Henderson UK Absolute ReturnAnalysis Save to my funds Add to basket or Premier Multi-Asset Absolute ReturnAnalysis Save to my funds Add to basket.  Neither the best and worst 12-month returns nor the best and worst individual monthly returns exceed those of the FTSE 100 (table 3).

Proceed With Caution

The sector is a mixed bag, as we have often said.  Some funds have heavy stock market exposures, others more in bonds, and the balance invest in a range of assets or strategies.  Vigilance is required because, as we move through market cycles, the optimum funds will evolve – no one fund works well in all environments.

ACTION FOR INVESTORS

The Targeted Absolute Return sector contains 67 funds managed by 41 different providers, so offers investors variety AND danger, as well as some very small (sub-£50m) funds.  

  • But only about 50% have a track record of 5 years...
  • ...and there are some funds that are taking on much more risk than their peers

Investors need to be wary and ask questions, such as:

"if the performance of a fund in a “low risk” sector is better than many UK growth funds linked to the stock market, do I want to take that kind of risk?"

FURTHER READING

 

Table 1: Best and Worst 12-month period - January 2011-March 2017

Fund

Worst 12-month period %

Best 12-month period %

Argonaut - FP Argonaut Absolute Return

-25.63

41.87

CF Odey - Absolute Return

-21.03

47.53

City Financial - Absolute Equity

-19.71

40.44

     

FTSE 100

-8.74

28.41

 

Table 2: Best and Worst individual month - January 2011-March 2017

Fund

Worst month's return %

Best month's return %

City Financial - Absolute Equity

-12.66

11.51

CF Odey - Absolute Return

-11.01

8.89

Argonaut - FP Argonaut Absolute Return

-8.54

10.04

     

FTSE 100

-6.76

8.20

 

Table 3: Best & Worst periods (12-month & individual month) - January 2011-Mar 2017 

Fund

Worst 12-month period %

Best 12-month period %

Worst month's return %

Best month's return %

Henderson - UK Absolute Return in GB

-3.84

17.54

-2.55

3.26

Premier - Multi-Asset Absolute Return in GB

-0.02

10.77

-1.87

1.77

         

FTSE 100

-8.74

28.41

-6.76

8.20

 

Performance period: 01/01/2011 - 31/03/2017

Topic: Sector analysis


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