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Absolute return fund selection ‘potential minefield’

22 April 2020

Only one absolute return fund has beaten cash every year over the past decade, while three funds have failed to beat ten-year cash returns, according to analysis by AJ Bell.

The data showed that out of a total of 38 funds in the sector which have a track record spanning back a decade, only the Janus Henderson UK Absolute Return fund beat cash returns and delivered a positive return in each year during that period.

Blackrock European Absolute Alpha, Veritas Global Real Return and Premier Multi-Asset Absolute Return achieved returns in all but one year.

In stark contrast, Insight Absolute Insight Currency, GAM Star Global Rates and Jupiter Absolute Return failed to beat cash returns over the past ten years, the data revealed. The latter two delivered a loss of -8.1% and -4.1% respectively for that period, while the Insight fund made a marginal gain of 0.6%.

Laura Suter, personal finance analyst at AJ Bell, said many investors will be turning to absolute return funds either to diversify their portfolio or to introduce a fund focused on more stable returns to make their investments recession-proof amid the current financial turmoil.

However, Suter warned that the returns of the sector over the past decade have shown it’s a “potential minefield” for investors to navigate, with a massive spread in returns and losses among the funds analysed.

Suter said: “Looking at the 10 year figures, investors aren’t going to be bowled over. Over the past decade, cash has returned just 1.45% – far below the level of inflation. But even at that low bar three funds have failed to beat cash. The past year was the toughest of the past decade for the funds, with 26 funds of the 38 delivering a loss – a lot of which will be over the past three months alone.”

But Suter said investors shouldn’t just focus on the funds that have made a positive return over certain periods. For example, the Argonaut Absolute Return has delivered a 40% return for investors over the past year, but the previous year it handed investors a loss of 15.5%, while in 2016/17 it delivered a 19% loss.

According to Suter, the figures highlight how much investors need to dig into the sector to see which fund works for them.

Suter added: “The difficulty when comparing absolute return funds is that they don’t have a consistent benchmark between them, so while one might target the Bank of England base rate plus 3% over a five year period, another may just aim to not lose money every 12 months.

“Investors need to first assess whether they are comfortable with the stated benchmark and then whether they are happy with the past returns of the fund, and particularly how it has navigated down markets.”

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