The Absolute Return sector is known for its diversity. Ken Rayner, investment director at Rayner Spencer Mills, identifies some of the top products in the space.
The IMA defines Absolute Return funds as those managed with the aim of delivering absolute (i.e. more than zero) returns in any market condition.
There are however many ways of trying to achieve this, and while the funds may all sit in the same sector, there is great diversity in how they operate and the risks they take.
Absolute Return funds, while having the objective of an overall positive return, can fall in value and are unlikely to deliver the level of growth many investors require to reach their investment objectives – it is generally a lower risk, lower return sector.
Rayner Spencer Mills picks out some of its favourite Absolute Return funds
There are different types of Absolute Return strategies including long/short, market neutral equity, fixed interest macro, global macro, credit and emerging market debt. These strategies are likely to perform differently at different times of the economic and market cycle.
In order to try and make sense of the range of funds available, we have split them into four main types. These are as follows:
Market Neutral – these funds aim to deliver a positive return irrespective of the direction of equity markets.
Target Return – these are multi-asset funds. They look to achieve returns by exploiting opportunities in undervalued areas of the stock market or by exploiting relative valuation differentials.
Non-Directional – these funds look for opportunities regardless of market direction. They make use of the upside or downside of a market or asset class in order to achieve returns.
Fixed Interest – these funds look for opportunities for gains in the universe of fixed interest assets. These funds will be non-directional, aiming to take advantage of macro insights.
Different funds will suit different market conditions and this has been seen recently in funds adopting a long / short equity strategy where rising, and now very high, stock correlations have made positive returns very difficult to achieve, demonstrating that Absolute Return is an investment objective, not a guarantee.
There are also quite wide differences in the risks of the funds, even among funds adopting the same type of strategy. A simple but not necessarily simplistic way to look at this is to say that if a fund has delivered strong upside, it has the potential to fall in a similar manner.
Expertise is crucial
The expertise of the fund manager is crucial in this area, and it is important to look for a manager with a proven record.
'Managed separation update'
The chairman discusses his surprise holiday job
Three months on
Regulator has stepped in