Absolute return giants fail to pass muster in volatile H1

Given another chance to prove themselves following the pandemic, the retail giants of the absolute return sector have mostly failed to show their worth and provide investors with capital protection.

The average fund in the IA Targeted Absolute Return sector mustered a -1.8% return during the first six months of the year, according to FE Fundinfo, as the war in Ukraine, a supply chain crunch and spiralling inflation and energy costs upended global markets.

Out of 104 funds, only 32 managed to generate a positive return during the period, which was on par with sector-wide performance in H1 2020 as the Covid crisis hit.

As with that volatile trading period, there was a wide dispersion between the best and worst funds in the sector. The top performer, AQR Systematic Total Return, delivered a punchy 42.3%, while the biggest laggard, Baillie Gifford Multi Asset Growth, was down 15.5%.

Top five TAR funds in H1 2022 (%)

Source: FE Fundinfo

Notably, many of the best in show were from dedicated hedge fund and alternatives specialists like AQR and Winton. Barry Norris’ Argonaut Absolute Return fund (13%), which was the best performer during the Covid crash, Clear Peak Capital UK Long/Short (12.4%) and Fulcrum Diversified Core Absolute Return (7.3%) were also among the top 10 winners.

Gars extends losses but Jupiter Merian Gear bucks trend

Meanwhile, the mega multi-strategy funds that once dominated the retail sector, like Abrdn’s Global Absolute Return Strategies, failed to prove their worth in tough times (yet again).

Gars, which in its heyday was the largest fund in the UK with £26.8bn in assets, continued to disappoint; losing 7.3% for investors in the first half of the year. Assets in the fund have nearly halved over the past year, taking it down to £2bn in size.

Invesco Global Targeted Returns slumped even further, by 9.3%, over the period. At the end of 2020, it was the largest fund in the IA TAR sector at £6.7bn. But following a prolonged period of brutal redemptions, assets in the fund had fallen 86% to £937.1m at the end of June.

BNY Mellon Real Return, now the biggest fund at £4.8bn, was down 6.5%, while the £2.3bn Aviva Investors Multi-Strategy Target Return fund – set up by the brains behind Gars, namely Euan Munro – was just above the average at -1.6%.

One stalwart that had a slightly better time was the Jupiter Merian Global Equity Absolute Return fund. Though performance has been dismal in recent years, prompting investors to abandon the fund in droves, it has begun to see a reversal of fortunes. The $1.4bn (£1.2bn) fund was up 3.1% in H1 2022 and over one year it is up 7.8% versus the -0.8% sector average.

Bottom five TAR funds in H1 2022 (%)

Source: FE Fundinfo

See also: End of an era for mega absolute return funds as investors pull billions during Covid crisis

‘These were supposed to be boring, defensive strategies’

Darius McDermott, managing director of Chelsea Financial Services, says the H1 2022 data reinforces the fact that, despite being billed as ‘all-weather’ strategies that can perform in all market cycles, very few of them do.

“These were supposed to be boring, defensive strategies. You put 5%-20%, depending on your risk profile, in these things, and on a bad year, you might get 4%, and on a good year, you might get 7%-8% after fees.”

For many years McDermott was a Gars supporter and an advocate for the sector at large, a call he admits he “got wrong”. “Over time, in aggregate, they have all disappointed.”

Jason Hollands, managing director of corporate affairs at Evelyn Partners, says the fact the average fund has fallen 1.8% in the first half of the year is not the worst outcome, considering most asset classes suffered sharp declines, with equities and bonds tanking in tandem.

Period of wide dispersion could bring investors on side

Hollands thinks the “jury is still very much out” on absolute return funds, which have been “mostly off the radar” during the long, multi-year bull market just gone.

“If we enter a period of less correlation across asset classes and a continued wide dispersion between sectors and regions, this should throw up more opportunities for such strategies,” he says.

Despite the sector’s mediocre track record, GDIM investment manager Tom Sparke thinks tougher market conditions could push investors to reconsider absolute return funds.

“But I would be wary of starting a new position in a fund suited to this environment as things are changing rapidly and we could see a sharp reversal in the next few months,” he adds.

Performance fee arrangements are unattractive

Another black mark against absolute return funds is a decent portion still charge performance fees. Several benchmark performance against the Sterling Overnight Interbank Average Rate (Sonia), which is tantamount to charging fees for beating cash, McDermott notes.

The £44.2m Jupiter Flexible Macro fund, formerly James Clunie’s beleaguered absolute return fund, benchmarks performance against the Sonia GBP rate, as does the £1.3bn Janus Henderson Absolute Return fund. Both charge performance fees of 20%, subject to a high water mark. Over the past three years, the Jupiter fund has lost 30.5%, while the Janus Henderson vehicle is up 5.7%.

“Cash rates have gone up a bit in the last year with interest rates; but, for the majority the last decade, they’ve just had to beat 0.1% or 0.5%,” says McDermott.

“I don’t think that is a fair hurdle. If you want to take a performance fee, you need to be giving me a decent positive return.”

See also: Asset managers shunning Libor but inflation-plus still preferred benchmark for absolute return

Blackrock and Ruffer funds are rare standouts

While, overall, the sector has been disappointing, McDermott says there are “one or two good funds out there we can still hang our hat on”.

Among these is the Blackrock European Absolute Alpha strategy, which has surprisingly delivered “healthy” return of 4.3% over the last year, despite being long quality equities and short stocks with balance sheet issues.

Other standouts are the Brooks Macdonald Defensive Capital fund and the recently launched Ruffer Diversified Return fund. The latter, run by investment directors Duncan MacInnes and Ian Rees, has taken in £1.1bn worth of net inflows in the past 12 months, according to Morningstar, higher than any other UK-domiciled absolute return fund.

Sparke maintains a small amount of exposure to the TAR sector. “We tend to favour assets that don’t have equity correlation, which is more difficult to find.”

One of the funds he currently owns is Stephen Snowden’s Artemis Target Return Bond fund. “This fund holds a portfolio of low-volatility assets from the fixed income universe and adds a moderate return of 3%-4% per annum without correlating significantly with equity or bond markets.”