Pressure is mounting on absolute return managers to deliver what they promised investors – returns in all market conditions – as funds posted losses in the past year.
Poor performance has caused investors to question how long they will need to be patient in order to receive absolute returns.
Despite touting returns of up to 10% per annum, or at least promising to beat cash over 12 months, Cazenove UK Absolute Target, Octopus Absolute UK Equity and SVM UK Absolute Alpha are all in negative territory, according to Morningstar’s one-year figures. Meanwhile, top performers in the sector have posted returns of up to 20%.
Mark Dampier, the head of research at Hargreaves Lansdown, says target returns of 10% are “ludicrous”, and, while he understands why some funds have underperformed, the pressure is on managers to do something about performance, especially if the market turns.
“I have not lost patience with it yet but the question is how long should we be patient for? If they do not pull themselves up in the next year or so I suspect money will come out.”
Dampier holds the Cazenove and SVM vehicles as well as Liontrust European Absolute Return. Although, he adds, the funds are quite young and should be looked at over a three-year period, he will be reviewing his holdings if the markets change and funds’ performance does not.
Aidan Kearney, the co-head of multi-manager at Aberdeen, also says performance so far has been “disappointing” but adds this does not mean absolute return funds are a failure.
“We held the Octopus fund last year when it made a fantastic return of 40% to 50% but this made us pause and think about what would protect us on the downside. We sold it in the autumn.”
The Octopus fund is the worst performer, posting a fall of 14.59% over 12 months. Fund manager David Crawford admits positioning mistakes caused negative performance over the past nine months. May was the worst month, with the fund falling 9%, but Crawford says there will be periods when the fund beats the target return, therefore smoothing the figures.
The managers of the Cazenove, SVM and Octopus funds also largely blame being long defensives for the funds’ poor performance and, although they have made subtle changes, are sticking with their strategies.
Robin Minter-Kemp, the managing director of investment funds at Cazenove, says Tim Russell’s UK Absolute Target fund still has assets amounting to £380m despite clients only receiving 1.1% since launch. The fund’s target return is 8% to 10% per annum.
The portfolio has been long defensives and short cyclicals since 2008 and Minter-Kemp believes if Russell had reversed these positions he would have driven away investors as it would have crystallised losses and raised the product’s risk profile.
He adds there is little evidence of a strong recovery and Russell remains committed to his long defensives and short cyclicals strategy.
SVM manager Colin McLean has also stuck with most positions and says some of the previously damaging shorts have helped in the last quarter.
Gavin Haynes, the managing director of Whitechurch Securities, invested in this fund at launch but sold out earlier this year.
“We were impressed with McLean’s long-term track record running a hedge fund, and he may well turn it around in this retail version in the long term, but we felt uncomfortable with the level of volatility in the short term.”
Sector confusion
Despite investors’ concerns, money continues to pour into absolute return, which has been among the top five selling IMA sectors for 21 out of 26 months since its launch in April 2008.
Industry commentators are concerned, however, that there is a vast difference in strategy among the vehicles and some are worried investors do not understand what they are buying into.
Kearney says different groups have their own definition of absolute return, whether it is over three years or a full market cycle, and the strategies are very different.
“Every company talks about absolute return but what does that really mean? Do they mean in a three-year cycle or a full cycle? “Also, some are equity-based strategies, some are macro driven and some credit,” he says. “You would not normally compare an equity fund with a credit fund, but this is one of the reasons why we have gained some comfort in the poor performance.
If they are all falling then we know that something is not right out there. But some of these funds have been down 15% which they should not be if they are low volatility.”
Dampier adds absolute return managers rarely stipulate a time period over which they will deliver their performance targets, meaning there is a danger that clients will feel confused.
