Hendry tops charts as absolute return is labelled a ‘buy’

Hugh Hendry’s ‘miserable' outlook for the world economy has driven his CF Eclectica Absolute Macro fund to return 4.76% during the last two months of market upheaval.

The fund is the star performer in the absolute return sector, which has stacked up favourably compared to the rest of the universe.

Hendry positioned the portfolio with 63% in fixed income prior to July's sell-off, which has seen European equities fall 25% in the last two months.

According to Aberdeen's co-head of multi-manager Graham Duce, Hendry's bearish view on the global economy has been rewarded. Duce holds 4% of the fund in his Diversified Alpha fund.

"Hendry's miserable stance on the world economy has been paying off. The fund has returned 13% since May, he has been long German bunds and is very bearish on equities," said Duce.

According to Morningstar, Absolute Return is placed fifth out of the 30 IMA sectors, with the average fund losing 2.1% over two months, while the UK All Companies sector declined 12.45% and European funds posting a 16.87% loss.

Multi-managers have urged investors to stick with absolute return strategies, as  investors pulled a record amount of capital out of the sector in August - £122m, according to IMA figures. This is the worst monthly outflow the peer group has experienced since it was created in April 2008.

Thames River's co-head of multi-manager Rob Burdett said the sector should be thriving given the majority of absolute return funds take a market neutral position, benefitting returns in a falling market.

He added overall the sector has strongly performed and even an average fund in the bottom quartile of the sector has held up relatively well.

Emerging market absolute return funds fell furthest over the last two months, declining 17.2%, as managers were caught out through over-exposure on the long side.

“Out of the 62 funds in the sector, 17 have produced a positive return in the market sell-off, with the low beta market neutral funds performing well,” said Burdett.

“I was very surprised to see the amount of outflows in August as even the bottom quartile of the sector lost on average 5% – which is a lot better than the rest of the market.

“Investors may have been put off by a number of the funds running heavy long books, which has resulted in the absolute return emerging market funds posting the heaviest decline, but overall the sector has held up firmly.”

He added investors may also have been deterred by the double-charging structure on absolute return funds.

“With the typical fund having a performance fee in place for beating a notional benchmark, investors have been opting for cash as opposed to negative absolute return funds,” said Burdett.

Duce has been boosting exposure to absolute return funds across the group’s three portfolios.

“The funds with low beta have offered downside protection and as a result the sector has stood up well, beating highly respected funds like Richard Hodges’ L&G Dynamic Bond trust, which has lost around 10% since May.

“However there is a huge disparity in the peer group, as the difference between the best performing and worst is 33% – so the outflows could reflect the ambiguity in the sector."