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

Absolute return funds have been battered by a tide of redemptions during the coronavirus pandemic, suggesting the sector’s era of mega funds could be drawing to a close.

Data from Morningstar prepared for Portfolio Adviser revealed some of the biggest behemoths in the sector are now a shadow of their former selves after investors requested billions of pounds back amid the pandemic. 

The Invesco Global Targeted Returns strategy has suffered the highest level of redemptions, with investors yanking £2.6bn so far this year. With £6.7bn in assets under management it is currently the UK’s largest absolute return fund, though it has nearly halved in size from last June when it stood at £11.2bn.

Standard Life Investments Global Absolute Return Strategies, which as recently as 2017 was ranked as the UK’s largest fund at £21.6bn, has shrivelled down to a relatively paltry £3.7bn in size. So far this year investors have pulled £1.1bn though outflows are down considerably from 2019.

Behind Gars, the BNY Mellon Real Return and Aviva Investors Multi-Strategy Target Return funds have leaked around £990m and £955m respectively. 

James Clunie’s Jupiter Absolute Return fund, which started the year at £1.2bn, is now down to a measly £180.4m after being pummelled by £791.9m of redemptions and poor performance. Clunie’s fund, which started out on the wrong foot this year after its short bet against Tesla soured as the stock tripled in value, is the worst performer in the IA Targeted Absolute Return sector year-to-date with losses of 20.1%. 

Absolute return funds with highest net outflows year-to-date

Source: Morningstar 

Not included in the table is Ireland-domiciled Merian Global Equity Absolute Return fund which also saw a spate of redemptions with clients pulling £1.9bn, taking assets down to £1.1bn. 

See also: Invesco absolute return fund poised to overtake Gars for outflows 

10% losses during Covid sell-off are completely unacceptable

Outflows from the sector are partially down to the fact that 2020 has been on average another dismal year for performance, says Square Mile portfolio manager Charles Hovenden (pictured). 

Investors had been holding out hope that absolute return funds would be able to do what they say on the tin and protect capital as markets went into a free fall during the Covid sell-off between February and March. 

According to data from FE Fundinfo 88 out of 119 funds in the IA TAR sector fell in Q1 compared with just 23 that generated a positive return.

Of the funds that lost investors cash over the period around a quarter lost 10% or more. These included the Odey Absolute Return fund (-21.3%), BNY Mellon’s Multi-Asset Diversified Return (-14.5%), Baillie Gifford Diversified Growth fund (-13.9%) as well as Clunie’s fund (-12.7%). The worst performer, the Natixis H2O Multireturns fund, lost 30.9%. “That is completely unacceptable in this space,” Hovenden says. 

After a generally disappointing performance during crunch time and with equity markets on the rebound thanks to continued fiscal stimulus and, more recently, positive news about a Covid vaccine, Hovenden says the large exodus of investor money is unsurprising.

“They didn’t deliver when they were meant to in Q1, and now nobody cares and the stock market’s going up forever.” 

See also: How have absolute return funds fared against Covid-19 volatility?

“The Covid crisis was the first real opportunity the asset class had to prove its spots, and so in this regard performance has to be regarded as a disappointment,” says Brewin Dolphin head of fund research Michael Paul.  

“That said, very few of the funds are structurally likely to provide a positive outcome in these negative scenario,” he continues. “Instead they have the potential to, should the manager organise the portfolio for a more challenging outlook.”

Given that most fund managers were set up for a more positive macro environment in 2020, including those in the absolute return sector, it is somewhat understandable why they have struggled, Paul says.

Brewin Dolpin’s Balanced portfolio currently has a 10% allocation to absolute return funds which is a neutral weighting relative to its benchmark.

James Clunie fund gains 3% in Covid vaccine cyclical rotation

Chelsea Financial Services managing director Darius McDermott puts continued investor pessimism toward the sector down to the mega funds not living up to their past glory.

“There have been years some of these strategies have given us 7,8,9% percent in an uncorrelated way and that’s what we want and what we expected,” says Chelsea Financial Services managing director Darius McDermott.  

“But when, not only do they start to not give you positive returns, they give you negative returns, you can understand why investors have left them.” 

McDermott still owns a decent proportion of absolute return funds in his portfolios including the Janus Henderson UK Absolute Return fund, the TwentyFour Absolute Return Credit and the Merian UK Specialist Equity fund, which is up 11.8% year-to-date. 

He previously held Clunie’s Jupiter Absolute Return fund but sold out a year ago. Even before racking up double digit losses this year after its shorts against Tesla and Scottish Mortgage backfired, McDermott says the fund was struggling.

Clunie’s valuation driven strategy which puts him long cheap UK assets and short growthy US stocks has so far failed to pay off. Though during the cyclical rotation over the past week off the back of the Pfizer/BioNTech and Moderna vaccine news, his fund has risen 3.1%.

Jupiter did not confirm whether Clunie is still shorting Tesla which is due to enter the S&P 500 later this year.

Gars has been recovering while Merian Gear declines

Hovenden it is virtually impossible for “go anywhere long/short funds” like Gars which make binary macro calls on equities, currencies and other asset classes, to be consistently right.  “Gars got it right for a time, and then they didn’t. And we’ve seen that happen time and time again.” 

Despite the negative attention around Gars’ mediocre performance, Merian Gear’s recent track record has been far worse. The fund halved in size last year from £13.4bn to £6.9bn during which time it handed investors a 13% loss. So far this year it has lost 5.5% while Gars is up 5.1%. 

Invesco’s absolute return fund also boasts a worst track record, lagging the IA TAR average over all major time horizons, while Gars has only failed to beat the sector on a five-year view.

Source: Trustnet 

Similar to Gars the BNY Mellon Real Return fund has also delivered a positive return this year (5.0%). On a three and five-year view it has also generated substantially more than the sector, with returns of 17.1% and 26.0% respectively.

A spokesperson for BNY Mellon told Portfolio Adviser outflows from the fund followed “broader industry trends of outflows in diversified growth funds with assets being reallocated into different areas”. 

While UK investors have been pulling money out, they said the strategy continues to see “strong demand” from US investors.