Should the Absolute Return Sector be renamed the Absolutely Dire Sector?

Date Published: 13 November 2017

Category: Investment

For years, we have been astonished at how much money goes into the Targeted Absolute Return sector which has been perennially characterised by woeful performance and ridiculously high fees.  Is it because they are often sold on totally unrealistic expectations to clients, or is it that many Absolute return funds include significant performance fees and invest in complex strategies that make little sense, and are needlessly complex?

The Targeted Absolute Return Sector is regularly the best-selling sector, as the table below demonstrates:

 

Source: Investment Association – https://www.theinvestmentassociation.org/fund-statistics/statistics-by-sector.html

The top dog and largest fund, even after recent redemptions, is the Standard Life GARS Fund that stood at £22.6 Bn at the end of August  https://uk.standardlifeinvestments.com/O_M_Gars.pdf.  According to its factsheet, this fund ‘aims to provide positive investment returns in all market conditions over the medium to long term’.

Such an absurd claim, sorry aim, should trigger alarm bells immediately – it shows true ignorance or true arrogance to believe anybody could possibly know in advance what all future market conditions might hold.  But don’t worry, apparently Standard Life can see into the future even though it does not seem to have helped their recent performance.

To give them credit, they have (finally) changed their factsheets to compare their recent performance against their LIBOR+5% pa ‘comparator’, shown in red, rather than just the LIBOR cash benchmark, shown in light blue:

Source: Standard Life

This contrasts with their previous factsheets in which they only highlighted the lower LIBOR benchmark.  We have repeatedly raised concerns regarding GARS, and last November we included this response in the FCA Asset Management Study  https://scmdirect.com/wp-content/uploads/2017/02/SCM-Direct-Review-of-the-FCA-Asset-Management-Study-24-Nov-16.pdf

Source: SCM Direct

As a fund manager with some 28 years’ experience running money for a diverse range of clients and in a wide range of asset classes, including the first UK Long/Short Equity hedge fund, I confess to finding the strategy of the Standard Life GARS fund incredibly complex.  I very much doubt whether many clients will understand the various strategies used by the fund, not to mention the counterparty risk implicit in managing such a fund.

The latest factsheet of the fund refers to strategies below, to name a few:

– US real yields,

– Long equity variance,

– UK v German duration,

– HSCEI v FTSE variance,

– Asian v S&P variance,

– EuroStoxx50 v S&P variance,

– Australian v US duration,

– US front end steepener,

– Australian forward-start interest rates.

I wonder how many clients understand what these refer to?  My personal view is that the fund is so complex, it should only be sold to professional rather than retail investors. However, not everyone holds this view – Mr Burdett of F&C believes[1] the fund has gone ‘out of its way to educate people [about Gars] but they still do not understand it’. ‘It’s a complex product sold to people who are not complex,’ he said.  Mr Burdett, sorry, if you believe that customers do not understand the fund (as it seems you regard them as less intelligent than yourself), then surely the FCA should not be allowing ordinary retail investors to invest in something they do not understand?

As the legendary Warren Buffett famously said, “Never invest in a business you cannot understand.” He also said “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” And that “It is not necessary to do extraordinary things to get extraordinary results.”

Our own SCM Absolute Return portfolio has grown by 45.4% after fees i.e. 7.8% annualised over the last 5 years to end September 2017[2], which is more than double the return of the average Targeted Absolute Return fund of 17.8% i.e. 3.3% annualised over the last 5 years.  I don’t believe it’s because at SCM Direct we have some secret formula.   It is common sense – we charge much less than many of these Absolute Return Funds (many charge performance fees), and we invest in straight forward assets and strategies rather than ones that it seems only a genius like Mr Burdett can understand.

The fact is a very simple strategy can beat most of these funds.  A simple strategy of investing 60% in an iShares UK Government Bond ETF and 40% in an iShares MSCI World ETF would have beaten the average IA Targeted Absolute Return Fund in 9 out of the last 10 years.

[1] http://citywire.co.uk/money/investors-treating-uk-s-biggest-fund-unfairly-says-burdett/a1059722

[2] SCM Absolute Return Portfolio (GBP) Rolling Returns to end September 2017

SCM Direct Absolute Return Portfolio

Source: SCM Direct.com; FE Analytics

An investment in the average Targeted Absolute Return Fund would have grown by just 2.7% pa over the last 10 years to end September 2017.

This contrasts with the above strategy of 60% invested via a UK Gilt ETF and 40% in a MSCI World ETF would have grown by 7% pa after fees over the same period.  The fees charged by such a straight forward strategy would also be much less and much easier for clients to understand.

Surely its high time the Investment Association was forced to change the sector name?

 

Please Note

The value of investments can go down in value as well as up, so you could get back less than you invest. Exchange rates may cause the value of overseas investments and income from them to rise and fall. It is therefore important that you understand the past performance is not a guide to future returns. SCM Direct does not give personal advice.

SCM Direct is a trading name of SCM Private LLP which is authorised and regulated by the Financial Conduct Authority to conduct investment business.  Company registered in England and Wales, no. OC342778.

 

Sign up to our monthly factsheets