Healthy as markets have been in recent years, 2018 came as a reminder that they can move down as well as up. All the main asset classes were down for the year, with few bright spots for portfolios.
This could well lead to some awkward conversations between intermediaries and clients nervous about their investments. But it also prompts another question: what products should advisers turn to as a way of protecting assets, or at least lessening the pain, when markets take a tumble?
One area has proved especially popular in the wake of the financial crisis: multi-asset absolute return. This category of funds, which aims to produce a positive return over a rolling period, often of between one and three years, has gathered significant assets in the past decade. The best-known names, from Standard Life Aberdeen’s Global Absolute Return Strategies fund to peers at Aviva Investors and Invesco, have amassed substantial amounts of money. Many others have entered the space in recent years: more than 30 multi-asset funds currently sit in the Investment Association’s Targeted Absolute Return sector.
The fact these funds focus on capital preservation rather than growth means they should have protected portfolios during the widespread market falls witnessed in the final months of 2018. Equally, many seek to offer exposure to assets uncorrelated to equities. With investors now expecting more volatility of the sort seen last year, this should be an ideal time for absolute return funds to prove their worth. But many have run into trouble on several fronts. The first concerns performance: a look at returns from the higher-profile names shows they have not behaved as they were expected to in moments of market turbulence.
Aviva Investors’ Multi Strategy Target Return fund lost more than 5 per cent over this period, and while SLI Gars and Invesco Global Targeted Returns did better, both had slumped earlier on in the year.
While this is only a snapshot, a longer-term view does little to flatter performance. Over one year all three names lost money and, over three years to January 16 2018, only Invesco’s fund managed a positive return, of 1.1 per cent. The poster boys of the sector, at least, have struggled to live up to expectations (see Table 1).
Table 1: Performance of top and bottom five absolute return funds
Fund | One-year return (%) | Three-year return (%) | Five-year return (%) | 10-year return (%) |
Natixis H2O MultiReturns | 8 | 23.1 | 58.0 | – |
7IM Real Return | -2.5 | 18.5 | 23.9 | – |
Barings Multi Asset | -5 | 17.8 | 18.2 | – |
BM Brooks Macdonald Defensive Capital | -1.1 | 16.2 | 20.5 | 99.4 |
L&G Multi-Asset Target Return | 0.3 | 16.1 | – | – |
Insight Absolute Insight | -4.2 | -2.3 | -0.3 | 32.3 |
VT iFunds Absolute Return Indigo | -11.1 | -5.4 | -3.3 | – |
SLI Global Absolute Return Strategies | -6.7 | -5.5 | 0.9 | 53.1 |
Aviva Investors Multi Strategy Target Income | -5.8 | -5.8 | – | – |
Aviva Investors Multi Strategy Target Return | -6.4 | -5.9 | – | – |
Note: Figures as of January 16 2019. Source and Copyright: Money Management
An Aviva Investors spokesperson says the firm has made changes to its portfolio management team, and strengthened in a number of areas to help improve processes and performance.
Invesco head of multi-asset David Millar acknowledges 2018 was “a tough year for us and a lot of funds in the sector”, and says the team will continue to concentrate on good long-term returns.
A spokesperson for Gars says the fund’s realised volatility has remained consistent with its expectations, as has long-term performance. They add that the portfolio’s sensitivity to economic downside scenarios has been “much reduced” as a result of changes made in 2018 – and Gars did hold up relatively well in the dramatic fourth quarter of last year. A disconnect has perhaps emerged between those funds that are positioned more cautiously on equities, such as Gars, and those like Aviva that anticipate a restoration of market confidence this year.
