Which targeted absolute returns funds are worth considering?

It’s hard not to love the idea of absolute return funds. Their aim is to make you money, regardless of the economic backdrop. In challenging times, this concept is particularly seductive.

But how do they approach this objective – and are such goals realistic? What do you need to consider before committing your money to this area?

Here we look at the IA Targeted Absolute Return sector and highlight a number of funds that could be worth considering.

What is this sector?

Let’s start with a quick overview. Funds in the IA Targeted Absolute Return sector aim to deliver positive returns in any market conditions.

However, it’s important to acknowledge that returns aren’t guaranteed and the objectives of different portfolios in this area can vary. For example, some focus on generating positive returns in 12 months, whereas others concentrate on achieving this goal over rolling three year periods.

How to research this area?

The varying approaches means it’s impossible to accurately compare funds. They need to be analysed on a case-by-case basis. This involves getting to grips with each fund’s investment philosophy and process, as well as examining holdings to understand its exposures.

Some portfolios are totally focused on fixed income positions, while others look to add a variety of equity holdings into the overall mix. Then there are funds that pride themselves on including assets such as convertible bonds and preference shares in their pursuit of consistent returns.

Potential fund choices

So, where should you start? What do you need to look for? Here we focus on four funds in the IA Targeted Absolute Return sector that we like. The four funds we’ve highlighted each take a slightly different approach to one another, which perfectly illustrates the challenges involved in comparing portfolios.

BlackRock European Absolute Alpha 

The aim of this fund is to achieve positive absolute returns over a period of 12 months, regardless of the prevailing market conditions. The co-managers at the helm, Stefan Gries and Stephanie Bothwell, take a fully flexible, pan European investment approach to stock selection. This pairing, who focus on capital preservation and low levels of volatility, invests in stocks whose share prices should rise, as well as ‘shorting’ those that are expected to fall.

The fund could be a good option for those wanting exposure to both long and short ideas, as well as companies listed in the UK and mainland Europe. According to the most recent factsheet, the fund’s largest holdings include Novo Nordisk, RELX, Pernod Ricard and Compass Group*.

Brooks Macdonald Defensive Capital

This is a defensive multi-asset fund, focusing on long-term capital growth and protection, that aims to deliver positive returns over rolling three year periods. It’s fair to say the list of assets that the fund holds can seem a bit complicated as it includes convertible bonds, preference shares and structured notes. However, the fund’s manager, Dr Niall O’Connor, uses a range of tools to increase – or decrease – the fund’s sensitivity to market movements.

The goal is to create a portfolio with ‘predictable’ performance by investing in assets that have fixed returns. This makes it attractive to investors looking for a defensive fund, which can help diversify away from equities and bonds. According to the most recent factsheet, real assets has the largest share of assets under management of 35.8%, with 22.9% in convertibles, and 10.7% in specialist lending**.

LF Ruffer Diversified Return

Protection of investor capital is at the heart of the LF Ruffer Diversified Return fund, which aims to deliver consistent positive returns. It contains a wide variety of assets, including short-dated bonds, index-linked gilts, commodities and international equities, as well as currency allocation.

We like the fact this fund does what is expected of an absolute return portfolio: protecting investors’ assets and then looking to grow the portfolio’s value. Its unconstrained global approach and broad approach to asset allocation has managed to deliver returns in numerous market conditions. The managers are also backed by a strong, experienced team of macroeconomic and stock selection specialists whose knowledge and opinions are factored into portfolio construction.

TwentyFour Absolute Return Credit 

This is a fixed income fund that aims to deliver a positive absolute return over three year periods, regardless of the backdrop and with a modest level of volatility. The focus of the portfolio’s manager, Chris Bowe, is investment grade bonds that are due to mature shortly. The fund is also easy to understand, which is a bonus.

Chris has a strong emphasis on stock selection in order to generate alpha and further manage the various risks involved. As part of that objective, all bond positions must pass a rigorous screening process to show they have good return potential with low expected volatility.

TwentyFour remains one of our favourite fixed income investment houses and we also like this fund’s low charges.

*Source: fund factsheet, 31 March 2023
**Source: fund factsheet, 30 April 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice. The mention of specific securities and funds is for illustration purposes only and not a recommendation to buy or to sell.