A handful of the largest Targeted Absolute Return sector funds have given the underperforming peer group a "bad rep" over recent years, but investors appear to be waking up to opportunities outside the big brand names, research suggests.
Using FE data, Investment Week found an equally weighted portfolio of the five largest funds in the absolute return sector - which, with a combined AUM of £40.12bn, account for almost 50% of the sector's total AUM - has failed to outperform the basic rate of interest in the UK over the past three years, returning 1.13%.
Meanwhile, the IA Targeted Absolute Return sector average is up 4% over the same timeframe, having comfortably outperformed base interest rates.
When the five behemoths - Invesco Global Targeted Returns (UK), Standard Life Global Absolute Return Strategies (GARS), Merian Global Equity Absolute Return, Newton Real Return and Aviva Investors Multi Strategy Target Return - are removed, the sector's average return jumps by more than a quarter to 5.03%.
Out of the five IA Targeted Absolute Return giants, Newton Real Return is the only fund to have beaten its average peer with three-year gains of 6.26%.
Emma Richmond, fund management assistant on the Brooks Macdonald Defensive Capital fund, said at a roundtable last week: "The absolute return sector has a bad rep and it is no secret there are a wide range of funds doing a wide range of different things. Some of the flagship funds' [in the peer group] performance has not been great and they have seen outflows as a result.
"However, the recent movement in IA flows indicates the sector is turning a corner."
Investment Association statistics show that, over February and March, the most recent data available, absolute return funds have not been the worst-selling mandates, despite being at the bottom of the tables over the previous four months.
There has also been a gradual stabilisation of the sector's assets under management - as discussed recently in Investment Week. According to FE data, the average fund in the sector fell in assets by £85.5m during Q4 last year, whereas to the end of April, the average fund has shed far fewer assets at £40.4m.
Given the underperformance of the sector behemoths over recent years, and the fact investors could be starting to trust such funds once more, investment professionals said negative press may have overshadowed some of the more successful absolute return funds.
Charles Hovenden, portfolio manager at Square Mile, explained the firm has stripped its ratings from Standard Life GARS and Aviva Investors Multi Strategy Target Return because their performance has been unexpectedly poor.
However, he said Square Mile continues to rate Newton Real Return, along with other funds in the sector including Jupiter Absolute Return, BlackRock European Absolute Alpha and Artemis US Absolute Return, which range in AUM from £119m to £1.4bn.
"When stripping out the giants, 5% over three years is still not a very good return, but the sector is far from homogenous," he explained.
"Mathematically, if the sector average is 5% then clearly there are funds that have done better overall. So there are indeed opportunities available."