In theory, the Investment Association’s Targeted Absolute Return sector is supposed to be a safe harbour for investors, aiming to deliver positive returns in any market conditions, says the trade body’s website, come rain or shine.
Like Theresa May’s mantra of the month, it promises to be “strong and stable.”
However, for many of the sector’s largest players, that has proved to be a far cry from reality.
The woes of mega-absolute return strategy GARS have been well-documented in recent years and have cost Standard Life Investments £bns in flows.
The £24bn SLI fund was producing negative returns at the start of the year and only managed to return 0.69% on a 12-month view, according to FE Analytics.
Other GARS-equivalent products from retailers like Aviva and Invesco Perpetual have similarly struggled.
But despite the stumbles from the sector’s retail giants, a number of funds from smaller outfits have proved more consistent over time.
At a roundtable discussion on Wednesday, Brooks Macdonald’s Jon Gumpel, pointed to an interesting trend in the sector.
Looking at the information ratio of funds in the sector, 65% of the top 15 performing TAR funds were from boutiques.
The data from FE Analytics also confirmed that there were three funds of that group that remained in the top 15 over the one, three, five and seven-year time period.
The first, and smallest, of the trio of consistent performers is Smith & Willamson’s Defensive Growth Fund, currently £19.5m in size.
The £100m SVS Church House Tenax Absolute Return Strategies and Gumpel’s own £365m Defensive Capital Fund round out the list.
For Gumpel, the absolute return sweet spot is achieved when funds are producing returns above 3% and have volatility below 6.
Over a 12-month period, his fund has generated total returns of 11.27% at a volatility level of 4.24.
“You would expect the big retailers to have the biggest and best managers out there but the reality is, it is the boutiques that are doing consistently well,” he said.
The data is seemingly counterintuitive but raises an interesting point. Do boutiques have an advantage over larger retailers when it comes to managing volatility and delivering on the promises of the TAR sector?
Asked whether there was something giving boutiques a competitive edge in the absolute return sector, Gumpel replied: “It’s a specialist sector and that requires a specialist manager.
“The mistake people make is assuming if they go with the large retailer, they’re provided greater protection. I’m not sure the evidence backs that up.”
Sam Liddle, sales director at Church House Investment Management isn’t sure whether size factors into the equation of performance, though, he admits there are some benefits to a boutique approach.
Church House’s total return fund, featured in the top-15 funds mentioned by Gumpel, was originally set up for a private client but now is widely available.
“The original individual’s money is still in the fund and management meets with him on a regular basis to review it.
“We are entirely in touch with the end investor in a way that some of the bigger funds probably are not.”
Also, it doesn’t hurt that the fund’s manager and Church House CIO James Mahon has his entire pension fund tied up in the absolute return vehicle, he added.
Ultimately, he thinks the fact many of the best performers are boutiques is a coincidence. More likely they have a better handle of achieving
“We align ourselves in a group with funds we feel have a similar objective which is to achieve a very pure absolute return.
“The aim of the fund is only to beat cash or inflation or whatever is greater. Once you move into the realm of cash-plus 3% targeted return, you are taking a level of risk to achieve that new objective rather than the ultimate goal of getting an absolute return.”
