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 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