After three consecutive quarters of declining sentiment towards the asset class there was a four-percentage point uptick in sentiment during Q1 2019, according to Last Word Research, which surveys hundreds of fund buyers across Europe every quarter.
Source: Last Word Research
According to the data, 32% of continental European selectors looked to increase their absolute return allocation over the year to March 2020. Another 36% looked to hold, 4% to decrease, and 28% did not use the asset class.
Source: Last Word Research
Out of the 26 asset classes surveyed, absolute return came in at eighth most popular.
The research also found that Portuguese and Swiss selectors were the keenest to increase their allocations while the Spaniards continued to shun it.
Equity rally will not continue
Miles Ahead Investments managing partner, Tim Peeters, said during Q4 2018 he sold off his some of his absolute return allocation but increased his allocation during Q1 2019 after the “sharp and steep rally at the beginning of the year”.
Peeters said he also increased other risk-off assets such as gold.
“As well as increased volatility which may bring markets lower, general market sentiment is turning less positive and additional risks are popping up related to the US-China trade war,” Peeters said.
Banco de Investimento Global head of asset management, Rui Broega, said he expected the equity rally that started 2019 would not continue, and as a result he was looking to absolute return to explore the valuation dislocation that had spread across asset classes.
“There are still opportunities in the equity and fixed income market, but it is important to avoid traditional beta and correlations,” Broega said.
“We are trying to explore different points and risk factors by allocating away from traditional market exposures.”
Peeters said that the US-China trade war was still months away from being solved and this uncertainty would squeeze corporate investment.
“[The slowdown in investment] will lead to a bigger economic cool-down. So, it’s quite logical to take profits and seek somewhat more defensive assets,” he said.
Peeters added that broad-exposure passive trackers should be avoided in the next couple of years as pricier parts of the market were already overweight in such products.
“It’s good news for active managers, as it makes it more likely they will be able to outperform in the years to come,” he said.
Picking up the phone
Broega said that when picking an absolute return fund manager, he looked for those that picked up the phone.
“We only use managers when we completely understand their investment process and if they are always available to speak to us on the phone,” he said.
“If something is difficult to explain to my end client I don’t invest in it no matter how amazing the performance has been because we only invest in transparent portfolios with clear investment processes.”
Broega noted that star managers often did not have the time to speak to selectors all time.
“If I rely on first quartile performing funds there will generally be a tracking error between the first and 25th manager of about 2%. And the star manager will be less likely answer the phone,” he said.
In terms of an absolute return strategy, Broega said he was focusing on funds that could perform well during bad periods and had either weekly or monthly liquidity.
Eight months of outflows
According to Morningstar data, there has been eight months of consecutive outflows and over the year to April 2019 the sector had outflows of €43.9bn
The Morningstar data found that the only absolute return categories that produced inflows were event driven and long/short UK equity funds at €394m and €15m respectively.
The biggest losers were multi-strategy and market neutral equity funds with outflows of €1.7bn and €1.8bn respectively.
Largest funds make losses
FE Analytics data found that over the three years to 31 May 2019 none of the largest absolute return funds were in the top performing quartile.
Standard Life’s flagship Global Absolute Return fund (Gars) has continued to experience large outflows and has lost 7% over the three years to 31 May 2019.
Top 5 largest absolute return funds’ performance
|Fund name||Fund size||1 year to 31 May 2019 return||3 years to 31 May 2019 return|
|Merian Global Equity Absolute Return A||€8.2bn||-5.4%||2.8%|
|Schroder ISF Emerging Markets Debt Absolute Return B||€4.4bn||2.9%||2.7%|
|Invesco Global Targeted Returns E||€3.8bn||-3.2%||-7.2%|
|Standard Life Investments Global Absolute Return Strategies A||€3.1bn||-1.1%||-7%|
|Mercer Absolute Return Fixed Income M-1 Hedged||€2.6bn||2.4%||-7.3%|
Source: FE Analytics