Trustnet Magazine Issue 21 September 2016 | Page 25
/ SECTOR PROFILE /
“Investors
are the ones
putting their
capital at risk,
but managers
are getting the
rewards”
STILL A PLACE FOR THEM
trustnetdirect.com
PERFORMANCE OF SECTOR VS INDEX
SINCE FINANCIAL CRISIS
60%
IA Targeted Absolute Return (26.40%)
FTSE All Share (53.36%)
40%
20%
0%
-20%
May 16
Nov
May 15
Nov
May 14
Nov
May 13
Nov
May 12
Nov
May 11
Nov
May 10
Nov
May 09
-40%
Nov
However, Dan Mannix of RWC says
that talking about fees in isolation
oversimplifies the argument. He
points out that if a fund only gets its
money from fixed annual charges,
it is incentivised to gather as much
money as it can, regardless of what
its optimal capacity is.
“Performance fees mean it is
incentivised to deliver alpha,
without having to expand
limitlessly,” he said. “If you look at
something like a frontier market
fund, for example, there is no
question that even the largest asset
gathering firm would have limited
capacity – clients want the optimal
amount of money in a fund rather
than an unlimited amount.”
May 08
OVERSIMPLIFIED
Nov 07
“There has
been volatility
across a lot of
asset classes and a
lot of funds with high
profile reputations say
these conditions don’t work
for them – but these should be the
perfect conditions for absolute return
to show its worth.”
Moving away from fees, Coombs
says there is still a place for absolute
return funds in investors’ portfolios.
“Absolute return can be hard to
define – I don’t have a problem with
the term in itself as I run an absolute
return fund. What I do have a
problem with is where it is used as
an excuse to charge higher levels of
fees on what is basically a long-only
strategy.”
“I don’t think you would be better
off just putting money in a tracker,
for example – over 100 years you
probably would, but over five years,
markets are likely to be flat.”
Taking a closer look at the
comparison with tracker funds, the
sector does not come out well from
a total return point of view over five
years. It has made just 16.47 per cent
over this time compared with 70.48
per cent from the FTSE All Share.
However, the advantage of
absolute return funds becomes a lot
more apparent over the past decade
when the effect of the financial
crisis is still evident. Investors
who put their money in the FTSE
All Share at its pre-financial crisis
peak on 29/10/2007 would have
had to have waited for more than
three years to regain their losses,
compared with less than two for
those who allocated their money to
the average absolute return fund.
However, with the European
sovereign debt crisis in 2011 hitting
the FTSE All Share harder than the
IA Targeted Absolute Return sector,
investors in the former edged into
negative territory again in 2011.
As a result, someone who put their
money in the FTSE All Share on
the eve of the financial crisis would
have had to have waited until 2013
– more than five years – to match
the gains of those who had chosen
the IA Targeted Absolute Return
sector at the same time.
Here the benefits of using
absolute return funds seem clear
– especially for more risk-averse
investors. The question then is
whether you should be happy to
be hit with another set of charges –
just because something did what it
said on the tin?
Source: FE Analytics
23