Under the bonnet of Absolute Return

Mike Turner, Research Manager

Absolute Return funds are outcome focused funds that aim to deliver positive returns over a specific timeframe. These funds are usually benchmarked against cash rates and use cash + targets e.g. 3 Month Sterling Libor + 2%, 4%, etc.

There are various methods to assess Absolute Return Funds, some of these include:

• Whether the fund is producing a positive return in line with its time horizon target.

• How the fund measures in terms of risk adjusted performance over the target period

• How the fund performs in turbulent times for example Brexit.

However in this stats piece we’ll be taking a look at some of the more fundamental factors which include analysis of the management of the fund, the team setup and single asset vs multi-asset.

Objectives

First of all let’s look at some stats around objectives. 

The below chart shows the breakdown of the Absolute Return fund universe by rolling time objective:

We can see that the majority of Absolute Return funds target a 12 month rolling time horizon followed by 36 month time horizons being the second most common objective. A fund targeting positive returns over a 12-month period will usually have lower volatility than a fund aiming for positive returns over a three-year period or longer.

Management and Team

Absolute return funds usually have large teams working on different strategies within the fund as well as named fund managers. On average Absolute Return funds have 2 named managers. If we look at the combined relevant industry experience of the named managers on managing Absolute Return strategies, we can see that on average the combined experience is 23.5 years.

The combined experience ranges from 2 years where a fund has 1 named manager that may have experience managing other strategies but is new to Absolute Return, up to 90 years’ worth of combined experience, where there’s teams of multiple named managers with extensive experience of managing Absolute Return strategies.

Single Asset vs Multi-Asset

The below chart illustrates the Absolute Return universe split between multi-asset and single asset.

In this instance we define multi-asset funds as containing a mixture of asset classes, typically equities, bonds, commodities, property and FX. We can see a majority of Absolute Return funds operate single asset strategies, however, one of the benefits of a multi-asset strategy approach to Absolute Return is it gives the fund a larger toolkit to diversify the fund and deliver positive returns in various market conditions. Single asset funds are likely more prevalent as a multi asset team would require more personnel and experience, which implies higher costs and a need for larger funds-under-management (FUM) to cover these costs.