First up, the latest IMA statistics showed the sector had bounced back into favour among retail investors in the latter stages of 2011.
Then FE announced its re-rating of the sector with its new five crown system after it had devised a way of measuring performance that didn’t require a traditional benchmark.
Next Baring Asset Management revealed it was merging its Absolute Return Global Bond Trust into its Multi-Asset Fund, a move that saw it bow out of the Absolute Return space all together.
Finally, OBSR held a webinar on the topic (which is still available to view) and highlighted that while many Absolute Return Funds struggled last year, particularly those using a pair trading strategy, it was important not to lump them all together and instead judge funds by their own merit.
Peter Toogood, director of investment services at OBSR, and Anthony McDonald, senior investment research analyst for the firm, said during last year’s classic bear market the high correlation between stocks in the same sector meant selecting pairs to long/short was difficult.
This means funds in the Absolute Return Sector which would often be considered defensive and one-directional were rewarded for their approach.
‘Bucket’ of strategies
Here is the intrinsic difficulty in assessing the Absolute Return Sector, the sheer multitude of strategies and mandates which suggest it should in fact be a number of sectors.
And that is the big challenge the IMA will be faced with in its review of the sector, underway now.
Following the completion of the hotly-debated Managed Sectors review, the organisation will be hoping it can learn from past experience.
Fund groups are likely to be divided into diametrically opposed teams and will find it difficult to put aside vested interests. The best way to combat such seemingly immovable stances is for proper research to be conducted.
Thankfully this is exactly what the IMA intends to do. It has commissioned research to be conducted among both intermediaries and end investors, asking what their understanding of Absolute Return is and what they expect from these products.
This should help add credibility to whatever proposals the IMA Sector Committee come up with, which are scheduled for release in approximately six weeks’ time.
A consultation period with member fund groups will then follow, where the companies will put forward their suggestions for consideration.
Divided parties
There’s already a hint of division in the air, with BlackRock reportedly saying the three-year old sector has done well, is attracting lots of assets and should be left well alone, while Fidelity have called for its abolishment.
Neither of these extreme views are a likely outcome and the idea of an over-arching sector with a number of sub-sectors will probably be closer to the final solution.
It remains to be seen how the sub-sectors will be defined though, and with only 60-odd funds in the Absolute Return Sector there cannot be too many sub-sectors launched, otherwise they will be under-populated, as recently happened with the Mixed Investment 0-35% Shares Sector after the Managed Sectors Review.
A three-way split of equity-based, fixed income-based and unconstrained might well be a viable solution then.
In the meantime we will have to make do with what we have and, as Toogood and McDonald suggested, differentiate between different funds and strategies when selecting funds.
Their top tip is to look at the heritage of a manager and see if he has the experience and capability of running money with a strategy that works in more than two directions such as long-only. If the manager is new to the idea of long/short investment strategy they advise caution and to sit and wait until he has proved himself.
As with Absolute Return funds, managers themselves are not created equal.
How do you go about selecting Absolute Return Funds? Do you think the name of the sector should be changed? Let us know below.
