In recent years, the fund sub-sector seeing the greatest inflows has easily been multi-asset absolute return, home to several of the largest individual UK funds, writes Jeremy Beckwith.
The IA Targeted Absolute Return has consistently been one of the best-selling sectors all year and August alone saw inflows of some £480m.
The attraction to investors of these funds has been the promise of returns well above cash for limited amounts of volatility, and sophisticated investment processes aiming to exploit opportunities across all asset classes.
The 'giants' of the sector, which tend to dominate fund flows, are shown in the table below and a detailed analysis of these strategies shows performance has been mixed over different time periods. In particular, hindsight reveals that, once again, where fund flow from investors is heavily focused on one sector. It tends to lag in performance behind less-favoured sectors.
Newton, Standard Life Investments and Invesco Perpetual's absolute return funds have, to date, broadly achieved their return and risk objectives over the recent three- or five-year horizons.
But it is noticeable that none of these funds have generated much performance from the large decline in sterling post-Brexit (Newton has held a relatively high sterling weight in recent months).
This is in stark contrast to the more traditional fund sectors where beta returns predominate, and which have been significant beneficiaries of sterling's fall.
Meanwhile, although these strategies are the best known within the absolute return sector, there are funds including TM Fulcrum Diversified Absolute Return and Goldman Sachs Global Absolute Return which have similar objectives and approaches, but have not seen investor flows to the same extent yet.
Newton Real Return
Newton Real Return is the 'grandfather' of this sector. Launched over 12 years ago, it aims for long-term returns of cash +4% before fees over rolling five-year periods, and positive returns over rolling three-year periods.
The primary manager, Iain Stewart, aims to achieve this by investing predominately in equity and bond markets, and controlling net market exposures through active hedging of equity and currency market risk.
It can be best seen as a balanced fund that actively hedges its total equity exposure.
Stewart has been in charge of the fund since launch and has delivered a positive return in every calendar year to date. This was particularly noteworthy in 2008 when the portfolio was well prepared for the collapse in equity markets, but performance was disappointing in the 2012 to 2015 period, when he held a relatively cautious view on equity markets.
However, over the last 12 months the fund has returned 11.2% as the exposures to long duration government bonds and gold have paid off handsomely, in addition to strong equity sector selection performance.
This recent good performance has more than recovered the prior lagging returns, while maintaining low volatility.
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