It’s unlikely that any end-of-year quizzes asked which part of the market was most unpopular with UK investors in 2019, writes Laura Suter, but it’s a pretty interesting answer…
And that answer is Absolute Return funds. (Also, tell me if any quizzes like this exist and I’ll be along like a shot next year). Absolute Return funds were the worst for retail sales in seven of the 11 months we have figures for so far in 2019, based on the Investment Association’s monthly data dump.
Investors were so disgruntled with the sector that they have been redeeming money every single month since July 2018, although this really ramped up in November 2019 when £656m was whipped away from Absolute Return fund managers.
In total, since those outflows started, £1 for every £11 invested in the sector has been withdrawn, which makes for pretty miserable reading for the fund managers concerned.
But why the mass outpouring, and who has been hit? It’s been well publicised that the pioneer of the sector, Standard Life GARS (which is now called ASI GARS) has been haemorrhaging assets.
Absolute Return funds were the worst for retail sales in seven of the 11 months we have figures for so far in 2019, based on the Investment Association’s monthly data dump.
According to Morningstar data (which uses different metrics to the IA so doesn’t tally exactly) the fund has lost more than £8bn over the year to the end of November. That’s an outpouring larger than the total size of most funds. If that seems big, then consider the outflows over the past three years, which now stand at a whopping £21.4bn.
Next in line was Merian Global Equity Absolute Return, which lost more than £6bn during the same period, while Invesco Global Targeted Return and BNY Mellon Real Return lost around £2bn each.
The flocking of investors away from Absolute Return cannot really be pinned on them ramping up their risk appetite and instead choosing to invest in higher risk funds – over the same period we have seen a big movement of money from equity markets into bonds, as various worries about geopolitics and global growth meant many investors sought safety.
Performance is undeniably a big factor, and started the outflows from GARS, although the fund has actually picked up performance-wise recently. Over the 12 months to the end of November it returned more than 7%, which is ahead of the average for its peer group of just shy of 5% and far ahead of inflation, which was 1.3%.
Merian is not such a happy tale. Over that same 12-month period it handed investors a loss of almost 12%. Of course one year isn’t much time to judge a fund, but even over three years it has delivered a loss, albeit slightly lower at -9%. This compares to its aim to deliver an absolute return over 12-month periods.
I think for a long time Absolute Return was seen a worry-free place for investors to put their money. It took care of their low-risk allocation, they thought, and would be a good diversifier to their equity-only funds. Which worked until it didn’t.
What we’ve also seen is a huge rise in all-in-one funds, which work in a similar way as they spread money across lots of different asset classes – and so working as a useful diversifier. Vanguard LifeStrategy is the oft-quoted one but many platforms and fund houses have their own versions now.
You can pick lower-risk options of these, if that’s you aim. What’s an even bigger factor is that these funds are often very low cost, and in particular have no performance fee – a trait that is widespread across the absolute return space.
Until performance turns around, fees come down and performance fees are scrapped or made fairer, I can’t see the tide of investor money turning back to absolute return funds any time soon. Columbia Threadneedle started the year by announcing it would scrap performance fees on its long/short funds. I suspect it won’t be the last in 2020.
Laura Suter is a personal finance analyst at AJ Bell
This article orginally appeared on Professional Adviser on 14 January.