Absolute Return Funds – Independent Critical Analysis

With the success of the Standard Life Global Absolute Return Fund (commented on in previous newsletters) most of the other investment companies are chasing each other to come out with a competitive offering. Before I outline some basic details on each of them, it is worth re-visiting what these funds try to do. As I mentioned in my investment update, Balanced Managed Funds are traditionally the primary offering from life assurance companies and the ones most popular with large group pensions. As they are a crucial part of any life assurance company’s business and therefore they are watched very closely. Investment performance is compared rigorously to that of competitors. Over the past 10 years in Ireland this has meant they tended to be very similar and pressures to match their peers led to some fundamental errors. All but one had far too much invested in Irish equities (some committing over 20% of the fund), as they could not afford to miss out on the strong performance during the Celtic Tiger, particularly from the banks. Setanta Asset Management (Canada Life) were they only ones to see the error in having so much invested in such a small concentrated stock market. A truly active managed fund should not take much notice of the activities of their peers and make there own investment decisions, and this is what the new wave of Absolute Return funds are trying to do.

The chart above shows the Standard Life Global Absolute Return Fund (GARS) performance over the past 12 months, compared to the market average ‘Balanced Managed’ Fund. The performance figures over the period are very similar, with the GARS fund up 19.16% and Balanced Managed sector averaging 18.06%. It is worth noting though that the red line of the GARS fund is a lot smoother and less volatile for the same return. It also doesn’t track the managed fund line, instead moving up and down independently. This illustrates a more active investment management and decision making process. The chart is even more compelling over 2 years, below, with GARS up 22.88% and the average managed fund down 4.54%.

Summary of some of the Absolute / Multi Asset Return Funds on Irish Market

Blackrock Euro Absolute Return Fund (Aviva)
Blackrock are one of, if not the biggest investment manger in the World so this fund has a very strong firm behind it. It has a simple target of positive returns in all market conditions. Unfortunately, so far it hasn’t lived up to its billing and is in negative territory for 2010 so far. Management fee is 1.65% and there is an additional performance fee payable to Blackrock of 20% of the return above 3 month LIBOR.

Friends First Market Neutral Equity Fund
This fund is run by Insight Asset Management in the UK and is basically a long short UK equity fund. This means it invests in pairs of equities with the lead idea and an offsetting hedging trade. For example, the manager might like a particular stock and buy it, but then short the FTSE 100 index to protect against downside. The fund has been very stable since launch and would be suitable for anyone looking for less volatility in their core investments but with some potential to beat cash. The management fee is 1.35%

Irish Life CORE Fund
This fund is not getting as much publicity as the others but has been around for a while now. It is not marketed as an Absolute Return Fund but has a lot of similarities to the others. It is widely diversified and designed to give similar returns to a normal managed fund but with less volatility. It is a well designed fund with some clever investment ideas and reduces its volatility through diversification and by using managed futures through Abbey Capital (derivatives). It was only launched in May and is down 2.5% so far which is disappointing, although it is worth noting it only has a very short track record. Management Fee is 1.3%

Bank of New York Mellon Global Real Return Fund (New Ireland)
This fund is run by Newton, who are an investment subsidiary of BNY Mellon, but the fund is marketed here by New Ireland. It has an investment target of cash (1 month EURIBOR) + 4% per annum over a rolling 5 year period. The fund has a similar volatility profile to the Standard Life fund, but has underperformed slightly also. Management fee is also 1.35%

Standard Life Global Absolute Return Fund
The longest running retail absolute return fund available here. Its investment goal is cash + 5% per annum over a rolling 3 year period, irrespective of market direction. It has a very actively management style with up to 32 different investment strategies. The fund is more volatile than some of the others, but has been given a big endorsement with some of the largest corporate pension funds investing heavily in the fund, including Vodafone and Standard life themselves. In my opinion this is still the strongest managed fund in Ireland with the best mix between volatility and returns. Management Fee is 1.35%.