Wrong target - Investors in absolute return funds may not be buying what they think they are


Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

What are investors looking for from an absolute return fund? Firstly it might help to explain what the IMA define an absolute return fund actually is – An absolute return fund aims to deliver positive returns in all market conditions over a stated period of time (subject to the usual caveats that returns are not guaranteed and capital is at risk). If you asked the average market investor to define what he was looking for from an absolute return fund, he might not give you this exact same answer. However, here on The Value Perspective, we feel we on safe ground in suggesting that what investors are very much not looking for from an absolute return fund is holdings that have a more than 90% correlation with those of funds in the UK All Companies sector.

That, however, was the gist of a recent headline in the financial press that, if true, should be a graphic reminder of why you should have some idea of what lies ‘under the bonnet’ of your investments. For surely the one thing anyone can reasonably assume about their absolute return fund is it is striving for absolute returns – rather than being, say, a ‘timing’ fund that punts when to go long or short the market.

Regular visitors to The Value Perspective will be aware we have no faith at all in the ability of any investor to time the market – starting first and foremost with ourselves. That is probably why we like to make ourselves feel better by suggesting that lots of other people are bad at timing the market – before going on to prove that lots of other people are bad at timing the market.

The article on those 90%-plus correlations also noted how this January saw flows into the Targeted Absolute Return fund grouping reach their highest level since 2009. That would suggest investors are heading to the sector because they are worried about markets – they want to scale back the risk a negative setback in market conditions might have on their portfolios and move into strategies that are not solely long-equities. History suggests when investors believe they are buying one thing and end up with something wholly different, everybody loses.


Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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