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07 June 2010

Multi-Asset funds a far better bet in today’s chilly investment climate, says Rob Pemberton Blackrock UK Absolute Alpha posts ‘disappointing’ returns year to date Likewise Gartmore UK and European Absolute Return funds Standard Life GARS Fund – impressive, but opaque Look to multi-asset funds for more consistent performance (Ruffer, Trojan and Artemis) Absolute Returns failing to deliver as a sector AS a wave of renewed market uncertainties continues to rock share values around the world, Rob Pemberton, investment director with wealth manager HFM Columbus, today warns that investors in so called ‘Absolute Return’ funds are more at risk than they probably perceive. Pemberton is concerned that the sector, with its ambitions to ‘deliver more than zero returns in any market condition on a 12 month basis’, is giving investors a misleading impression. “What is happening in practise is that many funds have a high market exposure, sometimes 50% or more, and thus get a’ free ride’ if the market rises - but risk considerable losses should the market fall,” he said. “Clearly, in current conditions where we have a falling market, most sectors are going to be hit – the problem here is that the fund managers appear to give the impression that they will weather any storm over a 12 month period, and I don’t see how that is possible. “As has been well documented, ‘absolute return’ is merely an aspiration rather than a defined investment strategy and the IMA Absolute Return universe is a hotchpotch of funds with markedly different underlying assets and risk exposure. “Looking at the bigger and most heavily promoted funds in the sector, Newton Real Return is a very well managed multi-asset fund with over 50% equity exposure. “But I can’t see why it is in the Absolute Return sector rather for any other than marketing reasons,” he added. “Blackrock UK Absolute Alpha is a more a ‘correct fit’ being predominately market neutral and has returned an annualised 8% since launch in 2005 - but this giant fund has produced a flat return over 12 months and year to date in 2010 “The Gartmore UK and European Absolute Return funds have been similarly disappointing in 2010 – while the best performers year to date are the predominantly long only Schroder Asian Bond and Emerging Market Debt funds which are global Fixed Income funds, not market neutral vehicles. “Stripping these bond funds out, the returns of flat or down for most Absolute Return funds hardly justify this sector as being the new investment nirvana,” he points out. “Well regarded managers Cazenove and SVM have lost investors over 3% in 2010 so far in their Absolute Return Funds, whilst the one time darling of the sector, the Octopus Absolute Equity UK Fund has fallen by 15% this year, far worse than the FTSE fall of 2% (up to June 3 2010).” Pemberton is impressed by the £3bn Standard Life Global Absolute Return Strategy Fund, which performed strongly in 2009, racking up returns of 18%, and which has still protected downside this year producing a positive return of around 6%. He does, however, have some reservations. “This is a very impressive performance, but it is a complicated ‘global macro’ fund which combines multi-asset investing with an overlay of currency and derivative trading across many markets” he said. “My issue is that the fund can be far from ‘market neutral’ and the drivers of performance are opaque. It rather fails the ‘know what you are buying’ test and Standard Life does a poor job of explaining its complexities to investors.” And in the current round of market turbulence, Pemberton recommends investing in some of the multi-asset managed funds rather than in funds riding the ‘absolute return’ bandwagon. “Ruffer Total Return Fund and Troy Asset Management’s Trojan Fund are rather ‘old school’ in nature having a ‘private client’ or ‘family office’ mentality of aiming to protect investors’ capital and steadily increase its value year on year – but they have delivered precisely this objective over the last 10 years. “Also a good bet in our view is the Artemis Strategic Assets Fund launched a year ago and which to date has produce impressive returns. “It is again multi-asset but with a predominantly equity bias and is differentiated from the Ruffer and Trojan Funds by the extensive use of derivatives to produce ‘short’ positions, not only in equities but also in bonds and currency. The fund is transparent with the asset allocation and market exposures clearly detailed on the factsheet. “The proof of the pudding is that while the absolute return funds have by and large failed to live up to expectations the Ruffer, Trojan and Artemis Funds have all produced year to date positive returns in 2010 of around 6% after double digit gains in 2009. “They have significantly higher market exposure and hence potentially higher risk/reward profiles than many absolute return funds, but this risk is transparent to investments and the funds have over time demonstrated that they can control this risk to produce steady returns and preserve investors’ capital,” reckons Pemberton. - Ends -

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