Having been among the best-selling strategies just a few years ago, absolute return funds have fallen on harder times in recent years as investors have fled the mediocre returns on offer in the space for more attractive performance elsewhere.
With the strong sell-off in markets as the Covid-19 pandemic spread, it would have been assumed that these strategies would prove more resilient, but that has not been the case with 55 per cent of the IA Targeted Absolute Return sector’s funds in negative territory in the year-to-31 July.
However, investors have been falling out of love with the sector for a long time.
Despite being one of the most-favoured sectors in the wake of the global financial crisis – which saw the popularity of multi-strategy funds such as Standard Life Investments’ Global Absolute Return Strategies (GARS) soar – the sector has seen steady outflows, and has been the most-sold in five of the past eight quarters.
As the below chart shows, the sector has seen net retail outflows of £6bn over the last 13 months alone.
Source: Investment Association
As such, Trustnet asked three industry experts to give their opinion on absolute return funds and whether they can return to previous levels of popularity and back into an investor’s portfolio.
‘Interference in markets by central banks are making absolute return funds suffer’ - Adrian Lowcock, Willis Owen
Greater interference in markets by central banks since the global financial crisis has been the main reason that many absolute return strategies have struggled in recent years, according to Adrian Lowcock, head of personal investing at investment platform Willis Owen.
“The interference in financial markets, which are no longer operating as free markets mean valuations are less important because of the extra money flowing into markets,” he explained.
“The policy of developed market economies has been to pump more and more money into the system which in turn supports asset prices.”
Such underperformance in a bull market has dissuaded investors from the strategies, Lowcock explained, which is compounded by their inability to forecast the market direction.
“Because of their defensive positioning they then subsequently lag the market rally that comes with quantitative easing,” he added.
However, he said absolute return funds can adapt and factor in the changes that are going on.
“The current stimulus creates opportunities and trends for years to come in markets and absolute return funds can look to take advantage of that,” he added. “But they will struggle to beat a strongly rising bull market.”
One absolute return strategy that Lowcock particularly likes is the £5.9bn BNY Mellon Real Return fund, managed by Aron Pataki, Suzanne Hutchins and Andy Warwick.
“Hutchins looks to protect investors capital before aiming to deliver a 4 per cent return above cash each year over the longer term,” said Lowcock.
He said the fund is run with a core element of shares and bonds which is then supported by a buffer of cash, government bonds and derivatives in order to reduce risk.
“The fund is unconstrained and managed with a lot of flexibility taking into account the groups thematic views of the world,” he finished.
“The defence in the team” Darius McDermott, FundCalibre
Darius McDermott, managing director of FundCalibre who oversees several risk-rated funds, said the strategies provide diversification in a portfolio.
“To use a football analogy, they are the defence in the team,” said McDermott (pictured). 
He said that when markets are strong, investors begin to question whether having a fund in the portfolio returning a few per cent when others are returning 20-30 per cent is worthwhile.
“It’s at times like February and March, when markets go into free-fall that we’re reminded that they should come into their own,” he explained.
However, in a number of previous sell-offs, several high profile funds including the ASI GARS fund have disappointed over the last five years, McDermott noted.
“Combined with the fact that many in the sector still charge a performance fee, and the fact that the sector is so mixed it's hard to compare and understand some of the offerings,” said McDermott. “It meant that investors gave up on them just before they were needed.”
He said that if there is to be a comeback for the sector, it will need to prove it can do its job again.
“A few years of nice steady 5 per cent returns after fees in any environment wouldn't hurt to restore some confidence in the sector,” he added. “And if we get continued market volatility – especially when the global recession really starts to take hold and markets react – investors may start to return too.”
McDermott highlighted the £488m SVS Church House Tenax Absolute Return Strategies fund, a multi-asset fund – overseen by James Mahon and Jeremy Wharton, that unlike others in the sector doesn't use shorting at all, as his preferred strategy.
“It doesn’t have a performance fee either which is a bonus,” he finished.
‘Like an airbag, you only ever find out if they’re good when you need them’: Andy Merricks, independent fund strategist
Andy Merricks, manager of the 8am Global fund and independent fund strategist said, absolute return funds are “like an airbag, you only ever find out they’re good when you need them”.
“The worst thing that can happen with an absolute return fund, is that it loses money in a correction or a crash and then doesn’t join in the rebound,” said Merricks.
This is what has put investors off in recent years as well as overcomplicated investment strategies, he said.
Like McDermott, he likes the SVS Church House Tenax Absolute Return fund.
“It’s the most boring fund in the world,” said Merricks. “But that’s what they should be.
“It does its job, having something in there that might give you 1.5 to 2 per cent – net of fees – return over time is useful in times of crisis.”
Looking at whether investors are right to be dumping their absolute return strategies, Merricks warned that reacting too quickly to the recovery could be a pitfall.
“The very worst thing you can do if you’ve been caught in something that’s gone down and you haven’t is to then give up on that just as the rebound gives up and you lose another 20 per cent again,” he said.
Merricks likened what happened with gold funds in the last 30 years to give hope of a possible rejuvenation in absolute return funds.
“When various investment groups start shutting their absolute return funds down,” he said. “That’s when we’ll see it because that’s what happened in the past with gold. Between the 1970s leading up to 2008, there were eventually only two gold funds left.
“Suddenly, just as they were putting the lights out, all the gold funds came back. When groups give up on sectors and start closing their funds that’s the time to start sniffing around.”
He finished: “Although, for absolute return funds, we’re probably a few years away from that.”
Performance of funds vs sector over 3yrs
Source: FE Analytics
The BNY Mellon Real Return fund made a total return of 17 per cent over three years, compared with 1.12 per cent for the average IA Targeted Absolute Return sector peer (although it should be noted that the sector is home to range of different strategies). Meanwhile, the SVS Church House – Tenax Absolute Return Strategies returned 3.26 per cent over the same time frame.
BNY Mellon Real Return has an ongoing charges figure (OCF) of 0.05 per cent, while SVS Church House Tenax Absolute Return Strategies has an OCF of 0.77 per cent.