Manager skill at heart of absolute return funds.
THE FTSE 100 has been very kind to investors so far in 2016.
The index opened the year at 6,242 and had an intra-day high of 7,129 on October 16. This represents growth of over 14 per cent - not bad for those FTSE tracker investors out there!
Yet, it has not been a smooth ride (is it ever?) and the index fell to below 5,500 on February 7 so current levels are approaching a 30 per cent increase since then.
This is in spite of the EU referendum vote to leave which most predicted would be bad for markets.
After the initial shock on June 24, the index has risen significantly although much of this is surely due to weak sterling - many companies in the list benefit from profit-translation from abroad - rather than a genuinely bullish equity market.
These conditions have resulted in positive returns for many investor portfolios.
However, with some major equity markets at or near all-time highs, government bonds looking unappealing to most, commercial property funds having suspension and liquidity issues, and interest rates at new lows, what asset classes look attractive in an immediate future where we have concerns over how Brexit plays out, a US election with a win for one candidate which markets almost certainly wouldn't like (although the other one isn't much better), and continuing doubts over the strength of growth in China? Where should the more cautious - as many are nowadays - of us put their money to beat the pitiful rates offered by the banks and building societies? Absolute return funds aim to provide positive investment performance in all market conditions.
It is a philosophy which sounds too good to be true.
Indeed, the Financial Conduct Authority is investigating them as part of the UK watchdog's review of the overall asset management market and whether investors get value for money.
However, there is no denying their popularity - over the past two years retail investors have poured in money.
Just like a traditional fund, absolute return portfolios rely on fund manager skill.
The managers research their markets in order to arrive at a view of what is likely to happen, then build a portfolio to reflect that view.
The difference is that, with an absolute return fund, there is far more flexibility to connect manager skill into performance in a precise, timely and cost-effective way.
And the outcome is not tied to the fortunes of a particular market or index.
Of course, there are no guarantees. As of late summer, two-thirds of UK-domiciled absolute return funds had posted negative returns in 2016.
But, come rain or shine, absolute return funds aim to deliver a modest gain over the medium term.
The IMA Targeted Absolute Return Sector produced +1.89 per cent over one year, +8.06 per cent over three years and +17.10 per cent over the last five years in the period to August 31 this year. This dependability is key to their appeal.
The Standard Life GARS fund is a massively popular fund although in the recent short term is has not performed as well. The Aviva Multi-Strategy Target Return and Invesco Perpetual Global Targeted Returns funds are more recent entrants and have made promising starts.
The Henderson Multi-Manager Absolute Return fund is also worthy of consideration.
These funds could be a decent starting point for those new to the asset class.
As with everything, there are winners and losers, some fund managers perform well while others simply do not.
Nevertheless, any sector which at least minimises downside considerably while offering "cash plus" returns is surely worthy of consideration in most diversified portfolios.
Trevor Law is managing director of Merito Financial Services, chartered financial planners, based in Solihull. Email:firstname.lastname@example.org
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|Publication:||The Birmingham Post (England)|
|Date:||Oct 27, 2016|
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