Recent volatility on global financial market may have spurred investors to consider taking refuge in absolute return funds. However, analysis1 by Willis Owen, the online investment platform, shows that while such funds can protect portfolios against the down-side in the short-term, they underperform virtually every other sector in the longer-term.
The analysis1 shows that during the Global Financial Crisis, the FTSE 100 fell 47% from its peak June 2007 to its bottom in March 2009, whereas the IA Targeted Absolute Return sector fell just 3%. Similarly, in a more recent sell-off, the FTSE 100 fell 22% from a peak in April 2015 to its bottom in February 2016, whilst the IA Targeted Absolute Return sector fell only 1.8%.
The Absolute Return Sector has also delivered in terms of beating inflation: over the 10 years to 30 September 2018, the sector has delivered 10% above UK price increases.
However, the Absolute Return Sector has performed poorly verses virtually every other type of investment: over the same 10-year period, it was the worst sector in the Investment Association universe except for money market funds.
Nor do all funds in the Absolute Return Sector perform to expectations: the Willis Owen analysis also shows that on average, only two-thirds of funds in the sector beat inflation in any given three-year period.
Adrian Lowcock, Head of Personal Investing, Willis Owen says:
“Absolute return funds do have their uses and some of them have offered protection and helped investors to reduce volatility in their portfolios.
“Over the longer term though, the performance of absolute return funds has been left wanting. But these funds are not designed to beat equity markets when the going is good, and their performance is unsurprisingly poor given we have experienced the longest bull market in history.”
Willis Owen’s recommendations in the sector include Newton Real Return and Jupiter Absolute Return funds.