Absolute Return Funds Fail To Live Up To Billing As Almost Two Thirds Deliver Investor Losses

In theory, absolute return funds are an investment vehicle built to come into their own over periods like 2020. They are designed and marketed as safe haven investments that should offer modest, but consistent returns, regardless of whether markets are moving up or down.

Which means the past 12 months should have been the moment for absolute return funds to shine, while alternatives that powered ahead during the good times came a cropper. They haven’t.

Markets data research tool Lipper has recently published research showing that of the 71 absolute return funds available to UK investors, only 25 offered up positive returns over the 12 months to July 1^st this year. On average, absolute return funds lost 2.9%. That shoddy performance doesn’t improve over a 3-year timescale. Of the 59 funds tracked over that longer period, only 24 made money for their investors. The average return across the group was a loss of 0.1%.

The shoddy performance of absolute return funds is, however, coming home to roost. Fund research company Morningstar say investors have pulled £50 billion from the category over the past 23 months. Each month of those 23 also saw net capital outflows from absolute return funds.

But despite their underperformance, a sector study by online stockbroker and wealth manager AJ Bell highlights that they continue to charge expensive performance fees. Around £10.4 million in performance fees was raked in over 2019.

The Alpha Select Alternative fund and Absolute Value fund, both absolute return funds offered by the Man GLG group, brought in the highest performance fees of any in the sector, at £4.2 million and £3.8 million respectively. At least they returned a profit in exchange with the former delivering a 7% return and the latter 4.4%.

The Artemis US absolute return fund earned itself almost half a million pounds in performance fees for a return of 1.1%, which is less than the best savings accounts offer. But other funds still charged investors performance fees despite losing money. The Janus Henderson UK Absolute Return fund charged investors £35,000 for the privilege of sustaining a 2.15% loss.

AJ Bell’s Laura Suter believes the benchmark that absolute return funds have to hit in order to earn performance fees is set to low. Many are pegged to either the 3-month Libor interbank lending rate, which averaged 0.8% over 2019, or the Bank of England base-rate, which was 0.75%. With both having now dropped, performance fees could theoretically be earned this year for even weaker fund performances.

She comments:

“Investors should use an appropriate market index or measure of inflation, which would mean their money is at least keeping pace with rising prices before they are charged an extra fee.”

In defence of its fees, Janus Henderson responded to the research’s criticism with:

“The performance fee is not charged unless the fund outperforms the UK base interest rate over three months. Between 2009 and June the fund has delivered an annualised return of 5 per cent net of fees.”