Published in Citywire Magazine, February 2017 edition.
Absolute return funds experienced significant inflows over the course of 2016 as investors sought solace from low yields and low growth, but were you part of this growing crowd or do you remain wary of opportunities here? What absolute return managers are you backing to outperform in the coming year and who is delivering “true” absolute returns in your opinion?
Significant inflows in absolute returns is no surprise. Such environment makes investors sensitive to potential drawdowns in their fixed income or equity portfolios. Low yields and low growth potential do not provide sufficient cushions to pare losses, and recovery may take very long time. Investing in absolute return funds gives a sense of comfort to the investors that the fund managers will protect them from such unwanted events while pledging to deliver a sought after return above 4% to 6%.
We have always considered and invested in absolute return funds but mainly with the aim to increase the level of diversification in a portfolio. We are mindful that there is no silver bullet and these managers are facing the same heighten challenges than other investors to find sound opportunities in a challenging environment made of fast market rotation, low yields and low visibility in the macro and political landscape. Records of drawdowns exist also in the universe of absolute return funds and recent past performances have been lacklustre if not disappointing for many.
For 2017, if we assume that equity markets may do well but not great, supported by moderate growth and positive earnings revisions in a late market cycle, while the fixed income markets will be complicated by materialising inflation and the Fed slowly raising rates, then absolute return strategies will offer good opportunities to diversify away from beta exposure.
The strategies we would favour are the one carrying very limited beta to the fixed income markets, eventually a little bit of exposure to the equity beta such as in the Henderson European Absolute Return Fund, or market neutral such as the LFIS Vision Premia (UCITS and CIF).
Alternatively, we would look after strategies that can extract value from a higher volatility regime such as with the Allianz Structured Return Fund.
Highly diversified absolute return strategies with low expected volatility such as in the Invesco Target Return Fund could also fit the bill, but I would keep modest return expectations for such strategies given the macro environment