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Absolute return: Give me shelter

Absolute return: Give me shelter

Charlotte Moore
Tuesday 17th October 2017

If absolute return funds protect investors from the downturn that some believe is on the horizon, why is the UK’s gold standard fund having such a tough time? Charlotte Moore takes a look.

"For too many investors, the process of selecting the right funds has become a box-ticking exercise

George Cadbury, Gatemore Capital

If there was ever a time to invest in absolute return, it would be now. With equity and bond valuations looking overstretched, many are nervous about an impending market downturn. Absolute return strategies can offer some shelter from the coming storm.

Yet the UK’s most successful absolute return fund – Standard Life’s Global Absolute Return Strategies – has had a torrid year. In early August, the fund reported outflows of £5.6bn for the first six months of this year.

Standard Life’s distribution model means that the institutional outflows could be worse than this data suggests. David Vickers, senior multi-asset portfolio manager at Russell Investments, says: “For many of Standard Life’s retail products, investment into the GARS fund appears to be automatic.”

In other words, Standard Life has a default investment into the GARS fund, irrespective of recent performance. Vickers says: “For the outflows to be so large despite these in-flows is significant given the current investor appetite for the sector.”

The GARS fund’s fall from grace does not, however, reflect a wider rejection of the absolute return concept.

Shoqat Bunglawala, head of global portfolio solutions for EMEA & Asia at Goldman Sachs Asset Management, says: “It makes sense to allocate assets to absolute return funds given the current market conditions.”

Equity valuations are at high levels and interest rates are rising, which presents challenges for investors as they increase the probability of prices falling in both of those key markets Bruce Keith, CEO at InfraHedge, says: “There are public pension plans in the US who say they need to put an investment in place to protect them for when the markets turn down.”

Seasoned investors know that it is a question of when rather than if markets will turn. And markets will overcorrect, because they always do. Keith says: “Financial markets have been on such a run that it’s likely this market downturn will be sooner rather than later.”

Absolute return funds can act as a good way to mitigate this risk. Keith says: “An absolute return fund aims to perform well no matter the market conditions.”

But if absolute return funds can play an important role, why are so many investors turning away from the UK’s gold standard absolute return fund? Is this a broader reflection of investors falling out of love with the absolute return concept?

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