UK funds that promised retail investors positive returns in all markets have been hit by a tide of redemptions, having once been feted as the ideal product for wary savers scarred by the financial crisis.
Absolute return funds, which use a range of assets and derivatives, were promoted on the promise of a set level of returns above cash, in exchange for higher fees than standard equity funds. But after several years of failing to deliver, they have become the worst selling fund group in the UK with £15bn of net outflows over the past 12 months, according to Morningstar data.
“The sector saw an extended period of underperformance from late December last year to June 2019,” said Charles Younes, research manager at FE Investments. “Many of these funds did not have enough protection on the downturn, which made periods of negative performance stand out even more.”
The best-known in the category, Standard Life Aberdeen’s Global Absolute Return Strategies, or Gars, was once Europe’s largest investment vehicle. But its assets have shrunk from £13.7bn to £6.1bn in the past year.
Three years ago the UK Gars fund managed more than £26bn, while the overall strategy — including a Luxembourg version and segregated mandates — had €60bn (£51bn) of assets. Persistent outflows have dogged the £11bn merger in 2017 of Standard Life and Aberdeen Asset Management.
SLA changed the Gars manager from Guy Stern to Aymeric Forest in February, but the move has failed to quell outflows, which totalled £8.2bn over the past 12 months.
The company said performance had improved under Mr Forest and that returns were less volatile than equities.
“Existing clients noted this improvement has persisted and have started to increase their investments,” SLA said. “It will naturally take longer for those not currently invested to be aware of these improvements and to be attracted to the fund.”
Several of the other biggest absolute return funds in the UK market have also suffered heavy outflows. Invesco’s Global Targeted Returns fund dropped by a fifth in that period to £9.9bn having suffered £2.5bn of outflows. BNY Mellon’s Real Return fund also shrunk by a fifth to £6.4bn, mainly due to £2.3bn of outflows.
Clive Emery, multi asset portfolio strategist at Invesco, said the fund had suffered 18 months of poor performance up to last December, but over the past 12 months it had achieved a gross cash plus 5 per cent return. “We expect this recovery in performance, combined with the fund’s positive performance during the market sell-offs in December 2018 and May of this year, to give investors renewed confidence in the strategy,” he said.
BNY Mellon said its strategy had performed strongly in absolute terms, but its UK fund had “not been immune to the more jaded perception of diversified growth funds, with some assets being reallocated into different areas”.
It added: “The picture overseas is somewhat different, where the strategy is less mature and investors adopt a slightly varied perspective.”
Two Aviva Investors absolute return funds have also suffered in the past year. The UK Aviva Investors Multi-Strategy (Aims) Target Return fund has dropped a fifth to £4.3bn due to £1bn of outflows, while the UK Aims Target Income fund fell a quarter to £1.2bn, having bled £500m.
The funds were launched by Euan Munro, chief executive of Aviva Investors, in 2014 after he moved from SLA, where he had been the architect of Gars.
Aviva Investors said it had hired several fund managers to its Aims teams last year. This led to an 8.5 per cent return for the Target Return fund and 10.5 per cent return for the Target Income fund so far in 2019.
“While we experienced outflows earlier in the year, we continue to see interest from new and existing clients and this is translating into an improved outlook for future flows,” it said.