pa analysis: absolute return bond launches ahead of investor demand

The spate of new absolute return fixed income propositions comes at a time when both absolute and fixed income strategies are out of favour with retail inverstors.

pa analysis: absolute return bond launches ahead of investor demand



The latest retail sales figures from the IMA are for August 2011 and they show a net outflow of £122m from the Absolute Return UK sector during the month, the largest outflow since the sector was established in April 2008. To put this into context, the average inflow over the previous 12 months is of £162m.

For the same month, net retail bond sales totalled £108m, its lowest level since January and considerably less than the monthly average over the previous 12 months of £495m.

Yet Standard Life Investments (1 March), Threadneedle (July), Kames Capital (30 September) and BlackRock (today) – hardly specialist or niche providers – have all recently launched a fixed income absolute return proposition.

So why combine two unpopular investment types and offer them to UK investors who have shown they do not want them?

For Kames, the launch completes its fixed income range meaning, according to head of retail sales Steve Kenny, “clients can choose the building blocks which meet with their view of the world or markets.”

BlackRock’s launch extends its own (ground-breaking at the time) equity absolute return expertise into a different asset class. It will also help to make up for the shortfalls made by Mark Lyttleton, the high profile manager of the UK Absolute Alpha Fund, losing money over the past three, six and 12 months to leave the fund languishing in the fourth quartile.

Nick Little was named co-manager of the fund in September.

Meanwhile, Vincent Devlin’s European equivalent is in the top quartile over the same time periods, with consistent returns of 4.66%, 4.71% and 4.65% respectively.

Standard Life Investments has simply taken its highly successful – but highly criticised – GARS (Global Absolute Return Strategies) Fund and built a fixed income equivalent to give a diversifier to either a bond or an absolute return-based investment.

Threadneedle is already known as an absolute return manager and the introduction of its Global Opportunities Bond Fund is an addition to its existing three bond portfolios and on top of two equity launches earlier this year.

Investor sentiment might well take months, quarters or even years to come round to these new funds as, if the IMA stats are indicative of a trend, neither absolute return nor bond investing is likely to come back into favour for a while.

This is the advantage that size can bring.

None of the four have explained the fund launch as being “thanks to huge demand from our customers” because right now that demand is patently not there.  What they have done, without saying so explicitly, is to steal a march on those firms who do not have the luxury of introducing a fund today without demand already being there.

When demand does come back, they will be able to combine their distribution and marketing clout with a positive – hopefully – performance story and will therefore be ahead of the game.

The interesting thing will be to see if they can now deliver an absolute return.