Returns with little risk at a time like this?
As investor interest wanes in the face of falling stock markets and meagre savings rates, Julian Knight looks at the funds being marketed as an antidote
Sunday 01 March 2009
Even after 12 months during which share prices have fallen at an almost unprecedented rate, the fund management industry is still busy dreaming up ways to get investors to part with their cash. And the latest "must haves" are "absolute return" funds.
As the name suggests, these aim to give the investor a regular return above what is available through a cash savings account but with less risk than through a standard index- tracking unit trust or an actively managed fund, where the manager picks shares he or she thinks will perform well. How is this trick accomplished – the investment holy grail of returns with low-end risk?
"The idea is to give the standard retail investor access to a fund which uses many of the tools deployed by a hedge fund, without, crucially, the heavy borrowing that hedge funds do which makes them high risk," says Darius McDermott, the managing director of discount broker Chelsea Financial Services.
"Absolute return fund managers have numerous weapons they can deploy. They can buy and sell shares like a standard manager. They can short sell a stock which they think will fall in value in the future. Some mix shares with bonds and cash accounts too," he says. "By doing all this, the manager looks to break the link between moves in the underlying stock market index and fund performance."
And breaking the link with the underlying stock market has an obvious appeal in the current climate, where share prices have plunged as the world economy sinks into the mire.
With the 5 April deadline approaching for putting money in an individual savings account (ISA), and with investor interest in the stock market at near zero, the fund management industry is desperate to find something new and exciting to say amid all the doom and gloom. And as far as the marketing professionals, are concerned, the answer is absolute returns.
In the past few weeks, Gartmore, Ignis Argonaut and SVM have all launched funds in this category – a trend, according to Barry Norris, the manager of the Ignis Argonaut European Absolute Return fund, that reflects the tumultuous financial times we are living in. "This market is a once-in-a-generation cycle and the old models of simply buying some shares and holding on to them is not able to cope," he says. "The thing about absolute returns is that the manager has the freedom not only to buy stock he or she believes will outperform, but also to sell stock – through shorting – that is overvalued."
Across Europe, Mr Norris estimates, a quarter of stocks are undervalued, while up to half could be overvalued. In particular, he is bearish about mining and raw material stocks: "These have had massive growth over the past six years, but with the economic contraction a bit of bust is inevitable. All in all, across many sectors, there are lot of companies listed today which won't be around in a couple of years."
Generally, when fund managers talk about "freedom" to invest and short- selling stock, it equates to a high-risk strategy. But according to Adrian Lowcock from independent financial adviser Bestinvest, that isn't necessarily the case with absolute returns.
"It all sounds high risk, but remember that managers can use cash or bonds in order to hedge against stock market investment choices going awry," he says. "In some traditional unit trust funds, managers have to stay invested in their specific market no matter what is going on."
And Mr Lowcock adds that some absolute return managers are guided by the message that their funds should produce growth over the long term, without undue risk: "Look at Mark Lyttleton, the manager of Black Rock's Absolute Alpha fund. He takes the point that investors are using the fund to pay their kids' school fees or to finance their retirement seriously. In times like these, a manager with lots of freedom to act but with such a cautious outlook can be worthwhile."
But Mr Lowcock is a little more guarded in his approach to the absolute returns sector as a whole: "There is always a danger that investors get sucked into the latest craze. We have seen it before from technology funds through Russia.
"The difficulty is that the fund management industry spots a marketable idea and then rushes out a load of new funds, creating investor interest up until ISA deadline, but the funds aren't quite what they are cracked up to be and they underperform,
"This short-term attitude does a lot of damage to the industry as a whole as it turns off private investors," Mr Lowcock concludes.
In what has admittedly been a terrible year for stock markets, the longer- established absolute return funds have not pulled up any trees. Even Mr Lyttleton's much-vaunted Black Rock returned a negative performance of 1.7 per cent, according to financial information service Trustnet.
Some other funds have also had a difficult 12 months. The EFA Absolute Return Portfolio fund has lost 8.3 per cent of its value, for example.
However, funds in the sector as a whole have shrunk by around 2 per cent on average over the past year – and this has to be set against a drop of around 30 to 35 per cent in the British stock market as a whole during the same period, as the banking crisis and recession have deepened.
One fund, though, has bucked this trend with aplomb. The Threadneedle Absolute Return Bond has managed an eye-catching record of 11.1 per cent growth over the past year, and 24.1 per cent over the past three years. This is because it largely focuses on the bond market, which has fared far better than shares as companies, desperate to raise fresh capital, have paid bumper rates of return on the bonds they issue to investors.
Overall, Mr McDermott admits there are some "bad apples" in the absolute returns sector. "The problem is that some funds are simply too small and as a result they can't diversify their investments. And this means that they can't hedge their share picks as effectively as the bigger funds.
"There is another problem," he adds, "and that is if the stock market suddenly turns around and starts climbing again. Absolute return funds won't benefit from all of the upside then because they hedge.
"If I was picking an absolute return fund, I would go for managers and firms with a good track record in, say, the hedge fund field."
Mr McDermott at Chelsea Financial Services likes the look of the Cazenove UK Absolute Target fund and Legal & General's Diversified Absolute Return, which casts its net wide in a bid for performance. "As well as shares, the L&G fund looks at investing in currencies and bonds," he says.
Like Mr Lowcock, Mr McDermott is also a fan of the Black Rock Absolute Alpha fund.
But the complexity and much-heralded promise of absolute returns does not come cheap. Annual management fees are typically 1.5 per cent and if the fund excels, managers routinely look to claw back extra fees of around 20 per cent of any outperformance.
"Be careful how managers levy their charges," says Mr Norris at Ignis. "Sometimes outperformance can just mean that it beats the stock market in a year, but when it loses a third of its value, that isn't much of a benchmark."
Mr Norris's fund uses a fee structure called the "high watermark". In effect this means that an outperformance fee will only be triggered if the unit price of the fund reaches an all-time high.
What's more, although fund units can be bought across the sector for an initial investment as low as £500 to £1,000, the upfront charges on the funds stand at around the 5 per cent mark, which is high. However, if the investment is made through a finance supermarket such as Funds Network, Hargreaves Lansdown's Vantage or alternatively via an independent financial adviser, these fees can be cut to around zero.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
Kate Hudson's online sports brand Fabletics drains your account if you don't say 'stop'
Bargain Hunter: Exclusive discount on a SmartGlider - a self-balancing electric scooter
My Tinder date asked for a refund when I declined a second meet up
10 tips for taking out a personal loan
The 10 Best money-saving sites
- 1 President Obama leaves touching comment on Humans of New York photo from Iran
- 2 If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
- 3 The Chinese city where men have 'three girlfriends because there are so many women'
- 4 German police forced to ask public to stop bringing donations for refugees arriving by train
- 5 Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition
Britain to take more refugees as Cameron bows to pressure after more than 250,000 back our campaign
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
iJobs Money & Business
£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
Day In a Page
In an elevated position above the bay, this four-bedroom home offers sea and headland views. There is a decked balcony and sun terrace - plus coastal walks on the doorstep.
With four bedrooms, this spacious maisonette in a mid-terrace period-style house in Holland Road is well-maintained and offers high ceilings and period features.
The terraces of this two-bedroom penthouse apartment offer panoramic views that stretch over fifty miles from the cliffs of Beachy Head.
In the heart of the coastal village of Mumbles and moments from the pier, this five-bedroom Victorian terrace is set over three floors and retains many original features.
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.