A look at Absolute Return investing
27 February 2010
I’ll start by wishing good luck to all of the competitors in this 2010 IFA of the Year competition. One of the areas that they might consider investing in to achieve the client’s aims is absolute return funds. Why do we invest? A fairly logical answer is to make money. Furthermore it is a reasonable assumption that the returns from risk free investments such as cash do not achieve individuals’ financial goals; otherwise there would be no reason to invest in assets which present greater likelihood of losing money. The fact of the matter is that in order to make a return in excess of cash one must take risk and therein lies the problem.
Whilst the name – absolute return fund – may seem an odd one given the initial statements, it is the way these funds go about trying to achieve a return of more than zero that sets them apart from more traditional funds. Equities have, over the long term, produced attractive returns compared to cash, however there is no escaping that it is the shorter term returns that are at the forefront of many investors’ thoughts. Even though 2009 was a very good year for equities it will still be of little consolation to those individuals invested in equities in 2008. Absolute return funds are aiming to reduce some of the uncertainty of investing, and whilst that will undoubtedly mean that they will not return as much as equities in the good years, well managed funds will also not lose as much in the bad years.
The Global Absolute Return Strategies Fund from Standard Life Investments aims to deliver the same return that has been historically achieved through a long term investment in equities, crucially however at a half to a third of the associated volatility of equity markets. As the name suggests the fund invests in a diverse array of investment strategies from across the globe all of which we believe have favourable return potential for the amount of risk we expect them to display. Whilst investing in traditional asset classes such as equities and corporate bonds it also routinely uses derivative markets to implement strategies. Whilst derivatives conjure up all manner of negative connotations, they enable us to implement our strategies with a great deal of precision and means we are exposed to only those risks we have identified as worth taking.
The concept behind the fund was conceived with the Standard Life staff pension in mind, and the scheme continues to be run using this strategy, the funds performance since inception in 2006 has proved very popular with other company’s pension’s schemes as well as with individual investors. The fund, which is an authorised unit trust, was the most popular Standard Life Investments fund in 2009- a trend which does not appear to be fading in 2010.
Is this fund the holy grail of investing? Of course not, it does however offer the opportunity of investing with less of the ups and downs associated with more traditional methods without necessarily sacrificing longer term returns.
Tam McVie, Manager of Standard Life Investments’ Global Absolute Return Strategies Fund
This article first appeared in The Scotsman on Saturday 27 February 2010
