PA ANALYSIS: Absolute return facing up to its “biggest enemy”

Added 6th June 2016

Sterling’s latest dramatic fall demonstrates investors’ need to manage both currency as well as equity volatility, but do the big funds deliver in mitigating these risks within your portfolios?

PA ANALYSIS: Absolute return facing up to its “biggest enemy”

It is easy to forget how far the retail funds market has come in embracing complicated absolute return strategies that were once the domain of a select few institutional investors.

Long/short for example, once distrusted as too exotic and dangerous for your average ISA has – in recent interviews with fund pickers – been referred to as both “vanilla” and “middle of the road”.

Since then, multi-strategy absolute return funds, with many wildly different and complex trades on show at once in different asset classes, have taken billions of pounds in inflows. But, still the majority of these have failed to deliver any ‘absolutes’ in volatile times.

Peter Lowman, chief investment officer at Investment Quorum, believes he knows the factors wrong-footing even the best of managers.

“The problem with running global absolute return, with long/short, global macro and other strategies is your biggest enemy is not the market – it is the central banks,” he says.  

"It is easy to forget how far the retail funds market has come in embracing complicated absolute return strategies that were once the domain of a select few institutional investors"

“They are catching managers out. One month you have the Fed talking about the US recovery, and the expectation is for a hike in rates; but then an outside force comes along and Yellen and co have to think again, such as if the wheels fall off in Europe after Brexit or China blows up.

“So they keep kicking the can down the road, and delaying. We’ve had one rate hike in a decade where at the beginning of the year they were talking about having four this year – I can’t even see us having one.”

Still, Lowman has been introducing “ballast” to portfolios with funds that short both equities and currencies – picks include JP Morgan Global Macro Opportunities and Aviva Investor’s Multi-Strategy funds, headed by ex-Standard Life GARS lynchpin Euan Munro. A further choice is Jupiter Absolute Return Fund, run by ex-SWIP manager James Clunie.

Lowman adds: “It’s exactly the same as a long-only market in that you have to find those managers that are really good and can deliver in a falling as well as rising market.

“After a few years we have sorted out the wheat from the chaff – there are some managers that can protect you on the downside and a lot of them are running new funds, but are older established managers or are using old investment processes that have been used elsewhere.”

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Gary Shepherd

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Portfolio Adviser

Gary joined Last Word Media in 2009, becoming editor of Portfolio Adviser a year later. Previously, he worked at Incisive Media with roles across its Professional Adviser, Investment Week, Bloomberg Money and Mortgage Solutions titles. Gary has been shortlisted for various awards, winning Headline Money Investment Writer of the Year in 2010.

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