As is so often lamented, the IA’s Targeted Absolute Return sector remains something of a mixed bag with many different strategies at play, from long/short equity to global macro.
As already discussed this month, the Association has acknowledged the increasing blur between retail and institutional strategies, so will initiatives from Defaqto and other ratings providers really help or add to the confusion?
“Fund diversity has required a broader scope to consider all the various processes that help drive an absolute return fund’s performance, including risk control and research functions, and the number of fund managers responsible for the fund,” said Defaqto insight analyst Jason Baran.
“In doing so, we have taken account of traditional fundamental measures of a fund manager’s skill, as well as factors unique to absolute return such as batting average, drawdown risk and performance during turbulent markets.”
In practice, this means considering both forward-looking qualitative factors and historic performance.
For qualitative factors, items such as the level of ongoing charge figure and the experience and number of named fund managers are considered, while historic performance criteria includes the success rate of the fund at maintaining absolute returns and risk adjusted performance measures that emphasise tail risk.
A look at the 12 funds to achieve a full five-diamond rating outlines the problem in lumping different absolute return funds together. 7IM Unconstrained Fund, Standard Life GARS and Aviva AIMS, for example, are each a collection of multiple strategies, often pointing in different directions.
There’s also space for fixed income funds such as Alliance Trust Dynamic Bond, BlackRock Absolute Return Bond and Newton Global Dynamic Bond funds, each of which have very different risk/return profiles.
