Emma Wall: Hello and welcome to the Morningstar TV series, Ask the Expert. Here with me today to reveal two Morningstar Bronze-rated absolute return funds is Anthony McDonald. Hello, Anthony.
Anthony McDonald: Thank you for having me.
Wall: Tell me about a couple of your preferred absolute return funds.
McDonald: So, something like the Absolute Insight Equity Market Neutral Fund (rated 
Bronze by Morningstar analysts), which is managed by Andy Cawker and his team at Insight. It is a classic example of one of those funds where it doesn't necessarily shoot the lights out, but it's very steady and it doesn't really ever lose significant amounts of money either, and it does exactly what you'd want at the core of a portfolio.
Something like Cazenove UK Absolute Target (rated Bronze by Morningstar analysts), which is run by Steve Cordell and Julie Dean, the Cazenove team that recently got bought by Schroders, has a little bit more volatility in its past track record. You expect that, because they take directional positions in equity markets when they want to. So they have a long equity element and they have a short equity element, but the two don’t necessarily balance up to the same degree as they do in the Insight fund.
It doesn't necessarily mean that they are relying solely upon that directional decision, because they are making decision when they want to have exposure to equity markets. Over and above that, you'd say that their stock picking still shines through. So that's an example of fund we like very much, actually sales through the volatility of May and June 2013 very, very impressively, because the manager was roughly 15% net long equities.
What that means in practice is, if the equity market falls 10%, you'd expect the funds to fall roughly 1.5%, which is broadly the kind of parameters of the equity market fall we saw in May and June. Actually the fund made positive returns and quite considerable positive returns as well, and that goes to show that you can still have a flavor to a long/short equity fund even if you’re long equities or short equities in an adverse market period.
So they’re two of the funds we really like in the long/short equities space, and that hopefully gives a flavor for the way we think about them in terms are they neutral?, are they directional to equity market?, are they conditionally directional?, which means managers can take a longer or short view to the overall equity market, but they will do that at their discretion. That kind of framework helps us think about the risk and return that we might expect from such funds.
Wall: So investors forget about the fact that they are sitting in an absolute return sector and take each fund on its own merits?
McDonald: Absolutely right, and I'd say, I think a lot of investors and advisors are still used to building their portfolios around what we think of as traditional equity bond funds, and that's perfectly fine. We do that for many clients as well. But when they are trying to think about how they can fit these absolute return funds into that framework, I'd say, well, maybe you should think about whether that framework is still right. Maybe you should be building your portfolio around these core of theoretically stable, reasonably uncorrelated funds and put your equity and bond exposure around that to try and deliver a kind of – a form of positive outcome that you have more faith in.
Wall: Anthony, thank you very much.
McDonald: Thanks for having me.
Wall: This is Emma Wall for Morningstar TV. Thank you for watching.
