Ditch ab­so­lute re­turn funds af­ter ‘car­di­nal sin’ loss

The Daily Telegraph - Your Money - - OPINION - Jonathan Jones

Ab­so­lute re­turn funds, those that at­tempt to make money no mat­ter the mar­ket con­di­tions, have been ex­tremely pop­u­lar among cau­tious in­vestors ever since the fi­nan­cial cri­sis as peo­ple have sought pro­tec­tion from a re­peat of his­tory.

But these in­vest­ments did not live up to ex­pec­ta­tion in 2018, with the aver­age ab­so­lute re­turn fund fail­ing to make money last year, ac­cord­ing to data provider FE An­a­lyt­ics.

In a sim­i­lar way to gold and cash, ab­so­lute re­turn funds are sup­posed to an­chor a port­fo­lio oth­er­wise in­vested in riskier funds. Their job is to make money re­gard­less of whether stock mar­kets rise or fall.

There is no one way that this type of fund aims to achieve this ob­jec­tive. Some use com­pli­cated trans­ac­tions in­volv­ing mar­kets and cur­ren­cies, while oth­ers are more tra­di­tional multi-as­set funds. Key, how­ever, is that they are ex­pected to ex­pe­ri­ence low volatil­ity and should rarely lose money – cer­tainly not large amounts in a short pe­riod of time.

Ab­so­lute re­turn funds are not ex­pected to make as much money when mar­kets are ris­ing (al­though should still rise) but should come into their own when mar­kets are fall­ing.

Last year, how­ever, when global stocks fell by 3.8pc, the ab­so­lute re­turn funds sec­tor lost 2.9pc. Of the 118 funds, just 15 made in­vestors any money in 2018. The best per­former, Black­Rock Emerg­ing Mar­kets Ab­so­lute Al­pha, re­turned 12.3pc, while City Fi­nan­cial Ab­so­lute Eq­uity, the worst per­former, lost 17.6pc.

Gary Waite, port­fo­lio man­ager at Walker Crips, a bro­ker, said that the funds had failed to do their one job: “The car­di­nal sin for an ab­so­lute re­turn fund is to lose money when the mar­ket is go­ing down. Why hold it if they are just aver­age in all mar­ket con­di­tions?”

Many of the man­agers look­ing af­ter such in­vest­ments ar­gue that most funds aim to make a pos­i­tive re­turn over a three-year pe­riod, rather than just one year. Yet over the past three years, dur­ing which time global stocks have risen 40.2pc, the sec­tor has re­turned just 1.5pc on aver­age.

Of 105 funds, 64 have made a pos­i­tive re­turn over three years. Po­lar Cap­i­tal UK Ab­so­lute Eq­uity did best, up 57.2pc, while FP Arg­onaut Ab­so­lute Re­turn, the worst per­former, lost 23pc over this pe­riod.

De­spite more than a third of these funds fail­ing to meet their ob­jec­tive, in­vestors con­tinue to buy them.

Mark Dampier of Har­g­reaves Lans­down said peo­ple are seek­ing funds that can “turn lead into gold”, promis­ing good re­turns for no risk.

He added that the fi­nan­cial ser­vices in­dus­try has done its best to cre­ate some­thing to meet this de­mand, but the truth is that it is an im­pos­si­ble goal.

“All the prob­lems in the in­dus­try have come from lower-risk, ‘de­fen­sive’ funds try­ing to give clients what they want, which is a 10pc re­turn with in­stant ac­cess and no risk,” he said. “But it’s not avail­able. You are go­ing to go through hor­ri­ble pe­ri­ods whether you like it or not.”

Rather than buy­ing these funds, which are typ­i­cally quite ex­pen­sive and can be very com­pli­cated, Mr Dampier said that cau­tious in­vestors would be bet­ter served keep­ing more of their port­fo­lio in cash.

Or they could take a les­son from the his­tory of stock mar­kets, which shows that over time you are bet­ter off stay­ing fully in­vested in an eq­uity fund, re­gard­less of backdrop. Those look­ing to in­vest in this way can find in­spi­ra­tion in Tele­graph Money’s list of its 10 favourite de­fen­sive funds at tele­graph.co.uk/ go/de­fen­sive10.

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