The financial markets in May provided a reminder macro events, economic data and political decisions continue to create a recipe for market volatility.
Indeed, for long-only investors, the road remains one with many twists and turns.
The upshot of this was May saw the Absolute Return sector, as defined by the IMA, fall. The sector fell by 1.5% in comparison to a fall of 4.79% in the MSCI All Country World Total Return index during the month of May.
Drilling down into the sector it can be seen that, while a vast majority of the 40-plus funds cushioned the downside, a few fell by more than the overall index. Although this is disappointing, May has confirmed the sector, taken as a whole, held up well, acquitting itself and providing the smoother returns investors expect from absolute return vehicles.
When looking at the Absolute Return sector, it should be noted, while the IMA stipulates funds within the sector seek to achieve an absolute return over 12 months, there appears to be some inconsistency around fund objectives.
When further information regarding “Key Information Document” is disclosed and risk rating potentially enters the mainstream, the expected return characteristics will hopefully be harmonised. In the meantime, filters that can be used to assess the probability and likelihood of a positive return over the 12 months include Sharpe ratios, maximum drawdown and monthly losses.
Compared to other sectors, the absolute return discipline is relatively new within a Ucits III format. Indeed, only a quarter of the funds have a three-year track record and six funds have a five-year track record.
Given the different market environments we have had over the past five years (two bull markets, one sharp bear market and year-to-date trading range), funds that can perform well in all four cycles should attract more investors’ interest. That said, the choice of funds with a five-year track record is currently very limited when compared with other IMA sectors.
For all these reasons, it seems the Absolute Return sector is a healthy space to be in. Strong monthly inflows following new launches have expanded the pool of funds within the sector along with the inclusion of offshore funds in the sector.
Looking closer into the number and range of available funds within this sector, it becomes clear investors can enjoy a greater choice between market-neutral, long/short single asset, multi-asset long biased absolute return and macro long/short absolute return.
This greater choice enables investors to mix and match absolute return funds, which can be expected to behave differently within different market environments. The broadening of investors’ choice is a step forward for the sector, but this expansion still has miles to go.
Nathan Bance is director in UK investor solutions at Barclays Capital
