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Investors turn their back on absolute return funds
Investors have been pulling their money out of absolute return funds over the past year, as the sector has lost popularity.
The past 11 months have seen consistent outflows from the sector, with investors pulling £5.4bn from the funds over that period, according to figures from the Investment Association.
It comes after a period where absolute return funds were the darling of the industry, seeing £3.4bn of inflows in 2017 and £5bn of inflows across 2016, while also being the best-selling sector across the entire year in both 2015 and 2016.
We’ve previously highlighted the lacklustre performance of much of the sector, as well as the volatility that so many of these so-called ‘safe haven’ funds have seen. Alongside the performance issues endured by many of the big funds in the sector, we’ve been in a period where inflation has increased, and many of the fund returns have failed to keep up.
Standard Life Investments Global Absolute Return Strategies (B7K3T22) is seen as the pioneer of the absolute return funds sector. The complicated strategy uses a number of different fund managers each with allocations to specific areas of the bond or equity market to run the strategy.
It aims to deliver a positive return in all market environments and to return 5% above the return on cash over a three-year period.
However, the flagship fund of the sector has been hardest hit, with almost £10bn in outflows over the past year and more than £18.5bn of outflows in the past three years. The fund now has £8.2bn in assets.
The performance of the fund has been disappointing over five years, returning 5.8% compared to 9.5% for the sector average. What’s more it hasn’t even kept pace with inflation, which has added up to 7.7% over the same time period.
Many of the funds have failed to beat inflation, particularly those seeing the highest outflows. Looking at the largest outflows list, seven of the 17 funds with five-year figures have managed to beat inflation – just over 40%. Over one year, just seven out of 20 funds have beat inflation, roughly a third.
However, for those seeing the largest inflows, 10 out of 14 funds with five-year figures have beaten inflation, while 15 out of 20 funds have beaten it over one year. While inflation has picked up in recent years, this is still a relatively low bar to beat for so-called ‘safe haven’ funds that aim to provide positive returns in all market conditions.
Other outflows in the sector are more specific to problems at an asset manager rather than sector-specific. Ongoing problems at GAM, related to the suspension of fund manager Paul Heywood and the liquidation of his absolute return bond fund range are shown in the figures.
The GAM MultiBond Absolute Return Bond (B3B0FT3) and GAM MultiBond Absolute Return Bond Plus (B19DHH2) funds’ outflows are due to the liquidation of the funds. And while the GAM Star Global Rates (B5BJ077) fund isn’t being liquidated, it’s clearly been impacted by the ongoing turmoil at GAM.
Even though a number of funds have managed to attract inflows during this time, they are by far and away eclipsed by the outflows. The collective inflows of the top 20 funds over the past year doesn’t even amount to half the outflows seen on the SLI GARS strategy alone.
What’s notable is that while those attracting inflows have broadly seen better performance, particularly over five years, some of the funds still getting investor money have severely underperformed. Man GLG European Alpha Alternative (B3LIVG9), for example, has delivered a 4.6% loss over the past year, and a 1.4% loss over five years – despite this it has attracted £77m in new money over the past year.