3 Top Absolute Return Funds

ASK THE EXPERT: Morningstar fund analyst Fatima Khizou highlights three absolute return funds that have delivered positive returns to investors throughout market cycles

Emma Wall 5 June, 2015 | 12:42AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall, and I'm here today with fund analyst for Morningstar, Fatima Khizou.

Fatima Khizou: Hi, Emma.

Wall: Hi, Fatima. So we're here today to talk about absolute return funds. It's one of the sectors that you cover, and it's a sector that has had quite a lot of bad press in the past, because these funds failed to deliver what they said on the tin; absolute returns. However, there have been some changes to the sector and there are some diamonds in the rough that we don't want investors to be put off. So what's been going on with the sector?

Khizou: Yes, you're absolute correct. There has been very bad press on that sector given what's happened in 2008 that many of those funds have failed to deliver on the objective, which was to deliver positive return in each market condition and that haven't actually happened. However, there has been many changes following that, and one of them is the change of the sector’s name by the Investment Association to more of a targeted absolute return, meaning that it's not anymore a guarantee, but trying to achieve a positive return.

Wall: One of the challenges facing investors when it comes at the absolute return sector is they're so worried. I mean the way that Fund A absolute return and Fund B absolute return achieves those objective can be completely different. But that's where we come in, that's what you do as a fund analyst. You can help to sort the wheat from the chaff. So I know you've got three funds today that you'd like to highlight for readers that we think do have the potential to deliver over the medium term. What's the first fund?

Khizou: The first one is Absolute Insight Equity Market Neutral and as its title indicate it follows a market neutral approach, and it's managed by a highly experienced management team of four managers led by Andrew Cawker and actually three of them have worked together since 2005. And the idea here is that the managers are aiming to minimizing this fund sensitivity to the markets that are using pair trades. So they have managed to deliver absolute returns over the medium term. However, what should be bear in mind here is that such approach would only provide you with very modest positive return especially in the low interest rate environment we are in at the moment.

Wall: What's the second fund today?

Khizou: The second one belongs more to the category long and short and that's the Henderson UK Absolute Return Fund, and this is again managed by a highly experienced hedge funds, Luke Newman and Ben Wallace, and here their idea again is to generate positive return every year and through different market environments, but here it's by using long and short position. The manager is also mindful of the market environments. They have actually achieved to deliver over the medium and long term consistently.

Wall: That's no mean feat, is it, because shorting is very hard to do. So for them to put it off while the market has been changing, which it has considerably over the last 5 to 10 years is impressive.

Khizou: It is actually. Shorting is a skill that not many have even in that area. So…

Wall: And what's the third fund?

Khizou: The third one belongs more to the multi-strategy category and that's the Newton Real Return Fund, and this is again managed by a highly experienced manager, Iain Stewart and he has worked at Newton for more than two decades and he specializes in managing multi-assets funds. And the idea here is again generating positive return with a focus on capital preservation. The long track record of the fund, with the exception of 2011 where it failed, remains actually very strong.

Wall: Fatima, thank you very much.

Khizou: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BNY Mellon Real Return A GBP Inc121.78 GBP-0.12Rating
Janus Henderson Absolute Return A Acc182.10 GBP-0.11

About Author

Emma Wall  is former Senior International Editor for Morningstar

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