Why Investors are Flocking to Absolute Return Funds

Absolute return funds have seen more inflows this year than any other sector. Emma Wall discusses the appeal of absolute return with Jupiter's James Clunie

Emma Wall 28 July, 2016 | 10:45AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by James Clunie, Manager of the Jupiter Absolute Return Fund.

Hello, James.

James Clunie: Good morning, Emma.

Wall: So, your sector has been extremely popular with investors this year. Since January absolute return has taken more inflows than any other fund sector. Why do you think it's proving so popular?

Clunie: I think it's because the absolute return sector appears to offer what investors want right now. I think they want the chance to make some modest returns without having too much downside risk. And I think they also want something that may behave a little bit differently from what they already have. So, in principal, absolute return looks like a good space to be in.

Wall: But there are risks to absolute return, aren't there, because some of the funds don't do what they say on the tin?

Clunie: Yes. So, one of the – I won't call it promises – but one of the sort of implications or implied messages from absolute return funds is that they can make money in all environments which gives you a feeling that actually you're not going to lose a lot of money.

But actually, from time-to-time some absolute return funds do disappoint and I think it's important that people in the absolute return sector actually give the message clearly to investors that actually our job is to take calculated risks to try to make money. But once you take risks, you might lose money. So, I think we have to be clear about how much we can lose for investors as well as how much we might make.

Wall: Over the medium term though your fund has been one of the ones that has delivered. If we're looking then at the drivers into this sector at the moment, the risks, what are you most concerned about?

Clunie: I think it's a very challenging environment because it's very difficult to actually think your way through it in a logical manner. Once you start thinking logically and using some of the old frameworks of analysis, valuation and the likes, you find actually that that on its own doesn't seem to do the job. So, you have to then start thinking about political economy, motivations of different actors, like central bankers and politicians.

And that's difficult because actually one minute a politician is in power and the next minute they are not, or they are in power but they change the policies. So, actually, thinking your way through is difficult. So, it feels very challenging, very interesting, actually very tiring to run this kind of fund. But actually, we've got a good toolkit that allows us at least the opportunity to make money for clients in an environment where lots of things are difficult to understand and changing rapidly.

Wall: So, it sounds like there are challenges both from the bottom-up and the top-down. With that in mind, what tools are there within absolute return that are different from just say making up a portfolio of equities and bonds?

Clunie: The main tool, I think, is that you're allowed to short sell. This is something I love doing. It's my research specialization. What it means is that if you have a negative opinion on an asset, a bond or an equity or some other asset, you can benefit from it going down in price. And that's a beautiful took to have because it means you don't always have to wish for upside to be helpful for the economy or helpful for markets. You can be realistic.

You can say that looks heavily overpriced with a reason to go down; that looks a little bit cheap and you can actually two different positions with two different, sort of, approaches, long and short. So, that's the main thing that absolute return funds offer.

The second is, you're often allowed to invest in derivatives, some of which are simple, some of which are complex, and they allow you to hedge certain fragilities you might have in your fund. We use that power with respect because the complexity builds up. But again, it's nice to have tools that allow you to prevent losses or mitigate risks.

Wall: James, thank you very much.

Clunie: Great. Thank you.

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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Emma Wall  is former Senior International Editor for Morningstar