Investors vote with their feet and dump absolute return funds

Money Observer has been deeply sceptical of the merits of absolute return funds for a number of years.

There are increasing signs that investors have grown disillusioned with absolute return funds failing to deliver: new figures show it was the worst-selling Investment Association sector in November 2019.

A total of £656 million was withdrawn by investors, which marks the continuation of a trend that saw the sector at the bottom of the popularity stakes for seven months out of 11 in 2019.

The sector’s fall from grace comes at a time when there’s plenty of investor appetite for funds managed in a cautious or defensive manner. This is evidenced by the fact that volatility managed was the most popular sector in November for the first time, attracting investment inflows of £411 million.

The sector, which launched in April 2017 to home the growing number of funds that target a specific risk or volatility outcome, accounted for a quarter of all fund sales over the month.

As Money Observer pointed out recently, funds in the targeted absolute return sector are perennial underperformers. They have a plethora of tools at their disposal to try and protect investor capital during more turbulent times, but when faced with stormy backdrops the majority of funds in the sector fail on this key objective.  

The final three months of 2018 are an example of this; the period produced the 11th worst quarterly performance for global stocks over the last 48 years, according to data from Refinitiv.

As a result, 2018 as a whole was a tricky year for investors to make money; and to add to the pain, those who put their faith in targeted absolute return funds would probably have been disappointed. Figures from FE Analytics show that 16 funds in the sector produced a positive return, while the vast majority, 93, were in the red for 2018 as a whole.

Unfortunately, this is not a one-off. The last time funds endured a stormy backdrop, following the European Union referendum vote in 2016, 30 of the 93 then in the sector produced negative returns for the year.

Elsewhere, UK equity funds saw their best month of net retail sales since May 2019, with £108 million invested in November.

Those who did buy ahead of the general election will have benefited from the subsequent ‘Boris bounce’. In particular, smaller company-focused UK funds and investment trusts have performed strongly over the past six weeks or so.

Other popular sectors include mixed investment 40-85% shares (attracting £299 million of new investor money), North America (£292 million), global emerging markets (£240 million) and global (£166 million).

At the other end of the scale, investors continued to avoid open-ended property funds, with £150 million of investor money withdrawn from UK direct property funds. In total £1.8 billion left the sector over the past year.  

The outlook for property remains precarious, despite the general election removing some uncertainty regrading Brexit. The £2.5 billion M&G Property Portfolio, which was suspended in early December, shows signs of re-opening, though in its latest update to investors (on 2 January) M&G said the suspension will remain in place until cash levels are deemed sufficient.

The firm said in a statement:

“The immediate priority is to raise cash levels in a controlled manner. The fund managers and associated teams are working hard to increase the fund’s cash position and since the end of November, they have exchanged or completed on £70.4 million of assets and a further £67.2 million is either under offer or in solicitors’ hands.”

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.