The Schroder Absolute UK Dynamic fund, for example, has a 20 per cent performance fee. In its last financial year this meant an extra 1.48 per cent charge to investors on top of the ongoing annual charge of 1.67 per cent. In the past three years the total cumulative return to investors has been just 4.6 per cent.
The FP Argonaut Absolute Return fund has a 20 per cent performance fee. It returned 40 per cent, 14 per cent and 12 per cent in 2013 to 2015 respectively, no doubt generating significant performance fees. Perhaps investors will not be so keen to see the fund is down by 20 per cent in the current year.
Undoubtedly the major success story in this sector is the Standard Life Investments Global Absolute Return Strategies (Gars) fund. This fund has assets of more than £26bn, with the total being run with this mandate being about double that. While many investors have been attracted by a consistent performance record, even this fund has met with difficult times, having fallen by 7 per cent in the past year or so.
A commercial benefit Standard Life has is that by adopting a multi-strategy approach it faces fewer liquidity concerns than single-strategy funds, which might hit a winning formula, but then have to soft close as popularity builds.
Other companies are trying to piggyback from Standard Life’s success, with both Aviva Investors and Invesco Perpetual recruiting members of the old Gars team as they try to build their own franchises.
It is likely that we will see further innovation. If investors are going to hold more of their assets in absolute return funds then it makes sense to offer income-generating versions as well. This can be difficult because most of the underlying holdings will not naturally produce an income, but there are probably ways around this.
The Aviva Investors Multi Strategy Target Income fund pays a yield of 4.6 per cent and there are rumours that other managers may be looking to develop their own income-producing absolute return funds.
So the stage is set. Absolute return funds are already popular, but could have a much bigger role to play. For advisers the first challenge is knowing the products to select. Some are too volatile, some too correlated with equity markets, some have high charges and some have poor performance records or performance that is not likely to be repeatable.
The second challenge is explaining this to clients so they understand what they are buying. I am sure most clients do not understand the intricacies of the Standard Life Gars product, although hopefully most did understand their investment could fall by 7 per cent.
