While investors may have hoped absolute return funds would hold up relatively well in the drama of the sell-off, just one in four funds managed to produce positive returns, Morningstar Data reveals.
Absolute return funds are not easy to compare; not only do they have different levels of risk but their underlying holdings can vary vastly. The 121-strong group is a melting pot of strategies and asset classes. “When looking at this sector you might be comparing a fund that invests in equities with one that invests in bonds and a variety of other things, and that's important to bear in mind if you are comparing performance,” warns Rob Morgan, investment analyst at Charles Stanley.
The one thing they do typically all have in common is a relatively cautious approach and an aim, not to deliver enviable double-digit returns, but to simply outpace inflation and protect investors' money whatever the weather. “You want them to outpace cash in the long-term and to be uncorrelated to assets like equities, so in a sell-off they can give you a bit of resilience,” explains Morgan.
Given these aims, you might expect these funds to have produced relatively similar returns in the recent sell-off. But analysis of the Targeted Absolute Return sector, shows the gap between the best and worst performing fund in the first quarter of the year is a staggering 55.2 percentage points.
Best Performing Absolute Return Funds
Some 28 out of 121 funds in the sector were in positive territory in the first quarter - inluding two that returned 0%. It's no mean feat considering the indiscriminate sell-off that struck assets in March.
Leading the pack is FP Argonaut Absolute Return, a fund that describes itself as market netural and uses assets such as currency options, which are designed to do better when equities plunge. The fund achieved a return of 22.6% in the first quarter of the year, significantly ahead of its peers, and has produced annualised returns of 14% over three years, showing that it can perform during good times as well as bad.
| Fund | Q1 Return (%) | 3-yr Annualised Ret (%) |
| FP Argonaut Absolute Return | 22.6 | 14.0 |
| Wellington Global Total Return | 7.7 | 3.3 |
| GAM Star Emerging Mkt Rates | 5.6 | 0.9 |
| RWC Pensato Europa Abs Ret | 4.7 | 1.8 |
| Man GLG Alpha Select Alt | 4.4 | 9.4 |
| TM Tellwork UK Select | 4.4 | -1.9 |
| BlackRock European Abs Alpha | 4.3 | 5.7 |
| Merian Global Equity Abs Return | 4.2 | -2.8 |
| Allianz Fixed Income Macro | 4.1 | N/A |
| JPM Global Macro Opportunities | 3.5 | 6.9 |
Source: Morningstar Direct. Data to March 31, 2020
The Fulcrum Diversified Core Absolute Return is not in the top 10, but is still in positive territory - up 1.1% over the period. The fund uses derivatives to invest in currency, fixed income, equities and precious metals.
Suhail Shaikh, chief investment officer at Fulcrum says investing in gold and the Japanese yen at the start of the year has stood the fund in good stead. “The volatility of the Japanese yen was the lowest in 15 years, which is another way of saying the options on this currency were incredible. They helped protect from the losses the portfolio was experiencing," he explains.
Having just 13% of the fund in equities has also helped, says Shaikh, a decision made "as a reflection of the uncertainty, as we don’t know how this is going to pan out”. He admits that during the volatlity of February and March, the investment team changed their views every couple of days: “It’s not like we moved from 30% equities to 0, but more something like 15% to 10% to 8%. It’s extremely dynamic but it’s not swinging from one extreme to the next.”
He adds: "Typically markets don't go down for that long, so you have to keep in mind you absolute return strategy rather than just trying to be the heroes for a couple of months." The fund has produced a three-year annualised return of 1.4%.
Worst Performing Absolute Return Funds
“But absolute return funds are not a guarantee for returns,” says Morningstar analyst Fatima Khizou. She points out that many funds in this cohort have significant exposure to equities in sectors such as oil and gas, materials and financials, which were particularly hit by the coronavirus pandemic. “It was funds on the quality, growth and defensive side lost less money in the first quarter,” she says.
| Fund | Q1 Return (%) | 3-yr Annualised Ret (%) |
| Polar Capital UK Absolute Eq | -32.51 | -0.11 |
| H2O Multireturns | -31.06 | -1.53 |
| LF Odey Absolute Return | -21.30 | -1.53 |
| VT iFunds Absolute Ret Orange | -21.07 | -8.35 |
| Barings Multi Asset | -18.64 | -4.09 |
| Castlefield Real Return | -18.08 | -3.82 |
| Liontrust GF EurpStratEq | -18.01 | -2.35 |
| Tideway High Income Real Ret | -16.93 | -2.78 |
| IFSL Brooks Macdonald Def Cap | -16.81 | -3.24 |
| S&W Defensive Growth | -16.35 | -1.93 |
Source: Morningstar Direct. Data to March 31, 2020
At the bottom of the pile is Polar Capital UK Absolute Equity, down 32.5% in the first three months of the year - it is an incredible 55 percentage points behind the top-performing Argonaut fund. The fund's drastic falls can be explained by the fact that it invests predominantly in UK stocks, which it can also short or bet against.
While it is also in negative territory, down 9.38% in Q1, Charles Stanley's Morgan still rates the BNY Mellon Real Return fund, a multi-asset strategy that can hold gold and infrastructure. He says: “It’s a good risk-mitigating strategy, it has derivatives to protect in a market fall and help smooth out the turn in the market, and has delivered a decent return in the long-run." The fund has produced annualised returns of 0.43% over three years.
With such a variety of strategies and returns, Khizou says it vital that investors look carefully at what these funds actually invest in and what their aims are before adding one to their portfolio. She says: “Ask yourself: Is the objective feasible, does the investment process make sense?”
For those still in doubt about whether these funds can deliver, Morgan says investors shouldn't be afraid to just hold cash if they want to keep their money safe from stock market volatility: “Having cash is king. Cash allows you to immediately buy into an opportunity that arises in the market. If you hold an absolute return fund you don’t have that flexibility."
