“I am not sure how well absolute return funds have actually served people,” he says. “There is a mishmash of strategies within the category and the ones that we tend to prefer are the more vanilla funds, like Newton Real Return, which are a mix of bonds and shares and have a fairly flexible mandate with a focus on capital preservation.”
But what about newer, perhaps more complex, strategies? The Investment Association’s recent ‘State of the Investing Nation’ report acknowledges that “retail/institutional split is becoming increasingly blurred as a result of a number of developments”, including the growth of platform intermediation and the growing defined contribution market.
Add to this the need for capital preservation, and it is clear why fund management groups are keen to introduce hedge fund strategies within the UCITS format.
Recent fund strategies launched this summer with the promise of uncorrelated returns include BlackRock Strategic Funds Global Event Driven Fund, JP Morgan AM’s long/short UK Equity Plus Fund, Goldman Sachs Global Absolute Return Portfolio, and Aberdeen Alternative Strategies Fund.
Alan Higgins, chief investment officer at Coutts, believes that strategies such as those employed by event-driven investment funds can work within the UCITS framework, in part because they are equity based and less likely to suffer liquidity constraints.
He cites other UCITS products in this category from the likes of York (through Merrill Lynch) and PSAM (through Morgan Stanley), although these are names more commonly associated with the hedge fund space.
For the time being, Coutts invests in event driven via Bill Ackman’s Pershing Square closed-ended fund.
“Looking ahead, we continue to see more complex hedge fund strategies put into UCITS format,” he says.
Cash-rich strategies
“Equity-oriented strategies can work quite well, as well as macro strategies, which tend to be more cash rich from the heavy use of futures, although it is the credit-oriented and distressed debt funds that are harder to implement in UCITS because of the lack of liquidity.”
Absolute return funds continue to prove incredibly popular – the Investment Association’s Targeted Absolute Return Sector was the third best-seller in terms of net retail sales in July this year, behind Europe Ex UK and UK Equity Income. Total funds under management in the sector exceed £50bn.
It is the likes of Standard Life GARS, Newton Real Return, Old Mutual Global Equity Absolute Return, Carmignac Portfolio
Capital Plus and Schroder Emerging Markets Debt Absolute Return that dominate in terms of size.
So how have these funds – many of which are UCITS versions of hedge fund strategies – managed to gain so much traction?
Innovation from the fund providers is one thing, though for Gavin Haynes, investment director at Whitechurch Securities, there are other factors at play. “We are seeing greater choice because of the need for the safety checks and daily liquidity of being a regulated investment, but it also comes down to the changing nature of fund buyers,” he explains.
