Adviser demand for absolute return funds

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There is growing adviser demand for funds focused on absolute returns and capital preservation despite market volatility, according to fund manager Pengana Capital.

"The interest in and take-up of  funds that focus on generating absolute returns rather than returns relative to an index has increased significantly over the last year as advisers seek ways to maintain capital and produce reasonable returns in the face of volatility and stretched equity market valuations,” said Pengana’s distribution director Damian Crowley.

He believes it is adviser demand which prompted the Pengana Australian Equities Fund to recently be added to the Federation Managed Accounts platform.

Since it began in July 2008, the Fund has generated positive returns of 13.2% p.a. to 31 December 2013. The Australian share market (All Ords) generated 4.5% p.a. over the same period, according to Pengana.

The Fund – which recently passed $350m in FUM – is different from others in the market as it has a key focus on capital preservation and downside protection.

Pengana said it has a “commonsense investment mandate” which allows it to hold up to 100% in cash if suitable investments cannot be found and a concentrated portfolio of 20-25 stocks. 

The top five holdings in the Fund as at 31 December 2013 were:

DUET Group
ANZ Bank
Telstra
Resmed
National Australia Bank
 
  • Andrew Dudman on 31/01/2014 1:17:41 PM

    An interesting article on so many levels.

    I'm one of the many advisers who have toyed with absolute return strategies for my client portfolios (to meet a need for clients who don't give a toss about indexes and expect skilled managers to earn their salaries by performing in all conditions) but through either APL restriction or a lack of credible information on this sector of the market suitable product is difficult to source.

    The really interesting point here is a reference performance against an index. Absolute return funds should, by definition, be index unaware so why is this the only objective criteria the promoter or journo see fit to publish. Im not critical of the article specifically because this is a general observation of the industry. Certainly the ASX300 may have some relevance but is this the key criteria against which the absolute return managers earn their bonus? I hope not!

    I accept that in this highly regulated environment everything must be measurable but it needs to be relevant.

    In speaking with fellow advisers on occasion about this issue we have a similar problem - how do we measure risk and return in this sector. This challenge goes a long way to explain the popularity of index funds - it may not be the best solution but at least its measurable.

    I would value others thoughts

  • GAB on 31/01/2014 2:38:46 PM

    You're right Andrew....and how does an absolute return fund fit in with a certain risk proflie of a client. If a complaint should arise, how would the ombudsmen judge the risk of this absolute fund? I have no doubt they would side with the aggrieved investor "this absolute return fund was using derivatives, you should have known that....case closed".

    If there wasn't such a desire for us to pigeon hole clients into flawed asset allocations determined by a flawed risk profiling exercise.....then absolute retun funds would get more traction with advisers.

    At the moment...just stick them in the "other" category, benchmarked against an index that is not relevant. Label them all high risk.


  • Pat on 31/01/2014 2:49:59 PM

    A couple of good points, to which I would ask: how do you measure how "skilled" the current management are at generating the target returns compared to their salaries? It has been acknowledged continually through research such as SPIVA and DUNBAR studies that active management, on average, fails to add value to any index (apart from small companies and EM).

    Therefore, given the fact that a concentrated portfolio actively managed 'should' be higher risk (however measured), how will you know you will get alpha over the medium to long term to justify the much higher costs and risks?

  • Philip Reid on 3/02/2014 8:09:35 AM

    Hi Andrew, Interesting the issues you have raised... you may be interested to know of a 'user group' of advisers, which is forming to address many of the questions you highlight. The Real Return User Group. The first round table is to be held on the 11th February in Sydney. Contact me directly if you would like to know more or may I suggest a google search for Real Return User Group to see previous media. All the best

  • damian crowley on 3/02/2014 2:30:03 PM

    We agree with these comments and our Australian Equities Fund is index unaware and its benchmark is cash which we believe is the appropriate benchmark for an absolute return fund focused on returns of cash plus not returns relative to an index

  • Chris Gosselin on 3/02/2014 5:29:37 PM

    Hi Andrew and others,

    You are correct that strictly speaking absolute return funds should not be judged against an index, but rather against making, at minimum, a positive return. However given that many, or most investors relate to the overall market, or an index such as the ASX200 or 300, this at least gives some yardstick by which to judge their performance.

    Actual returns are however just one of the key indicators that should be used to evaluate a fund's performance. Volatility, Sharpe and other ratios, up and down capture relative to the market, and the consistency of returns all combine to create a risk profile which can be used to judge the manager's style and past track record.

    Correctly applied these allow selection of a fund or portfolio of funds which exhibits lower risk and volatility compared with an index fund, or any other investment. It is then possible to make a judgement as to the fund's performance, and as such value for the fees being charged.

    At risk of contravening the advertising limitations of comments you could Google Australian Fund Monitors or look at www.fundmonitors.com for further information.

    Regards,

    Chris

  • Pat on 4/02/2014 8:14:16 AM

    Damian, if we use an Australian equities fund that is "index unaware", how do we treat it from an asset allocation perspective? Surely, we should be treating it as Australian shares, and therefore, it would be appropriate to compare the performance of such a fund and other Australian share funds against an equities index such as AXJO?

    If we agree with that, why wouldn't your performance fees be assessed against an equities benchmark rather than cash?

    I would prefer to manage absolute return on a portfolio from an asset allocation perspective and then let the individual asset classes perform accordingly.

    So much research suggests that portfolio risk and return are fundamentally factors of asset allocation rather than security selection.

  • Andrew Dudman on 4/02/2014 6:20:41 PM

    I kicked off with some comments on this article due to a frustration with the information and support generally available to advisers on absolute return funds.

    I'd like to thank those who also posted as I've learnt a little more and hopefully this will promote further discussion within the broader advisor community.

    Also thanks to Philip who has brought my attention to an advisor group which is being formed to foster greater knowledge in this area.

    I think it's time I again looked at this area with the analysts who manage our licensee's APL and test the scope I have for providing advice to clients in this sector.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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