In a market saturated with products, it seems odd to ask for more. But while the retail fund universe is undoubtedly too large, with the bulk of assets concentrated in a handful of high-profile funds, genuine innovation remains scant.
There has been a proliferation of multi-asset and absolute return funds, but these are all too often based on existing strategies or ‘me too’ products that mirror those of successful competitors.
Here we explore the key issues shaping the future of absolute return, emerging market and passive funds, starting with the ongoing assault on the dominance of the active sector, which seemed to peak over the summer.
Moody’s Investor Services warned in July that while active investors would always be a necessary “component” for efficient price discovery, the current market ratio of one-third passive to two-thirds active was “not necessarily near an equilibrium point”.
Cost pressures, regulatory changes and habitual underperformance were all cited by Moody’s as driving investors away from active funds, warning that overcapacity was leading to “investment mediocrity”.
Identifying mediocre performance is not quite as easy as it once was. Growth is one thing but in a world of capital preservation and absolute return, it is harder for individual funds to stand out from the crowd, particularly when taking into account annual management and performance fees.
So how did we get here? Despite the reputational damage suffered by hedge funds in the 2008 credit crisis, many of these strategies have since entered the retail market via Ucits vehicles, most housed in the Investment Association’s Targeted Return sector.
Global macro, long/short, pairs trading and multi-asset were rare investments in retail packaged products a decade ago but have since become commonplace.
However, commentators have been quick to jump on poor performance – as with one of the most prominent funds, the multibillion pound Standard Life Gars, which lost 4% over the year to 23 August.
Indeed, two-thirds of absolute return funds reported negative returns this year and the Financial Conduct Authority is set to review the space. Volatility is a key measure in the IA Targeted Absolute Return sector, and funds from Argonaut Capital, Eclectica, Odey, 7IM and Columbia Threadneedle have been among the most volatile during the past three years.
Despite these concerns, according to senior analyst at Hargreaves Lansdown Laith Khalaf, such funds still play a crucial role. He says: “Absolute return funds have a place in portfolios as a diversifier away from equities. That kind of diversifier is thin on the ground at the moment, given where cash and bonds are in terms of their yield.”