UK investors put the most money into absolute return funds for over four years in January, according to the latest available figures. Laura Miller investigates what is behind the surge

Absolute return funds are enjoying a resurgence. Figures from the Investment Management Association (IMA) reveal the Targeted Absolute Return sector was the best-seller in January, raking in 343m of net retail sales.

The figure was the sector’s highest since December 2009 and near double its monthly average over the previous 12 months of 184m. So what’s behind this rush of money into absolute return funds?

Premier director of multi-asset David Hambidge suspects part of the answer is that the sector has been a beneficiary of bond sector outflows.

Money certainly is leaving fixed income. Bond giant Pimco’s Total Return fund, run by Bill Gross, had its ninth consecutive month of outflows in January. The $237 billion fund lost $3.5 billion that month, bringing the nine-month total to $47.37 billion of outflows.

Also I believe that absolute return funds are becoming popular due to the fact that investors are getting weary of the very poor rates being earned on cash deposits, and the fact that previous half decent fixed rate deals are now maturing and can’t be replaced at anything like the same rate, Hambidge said.

Diversification

Absolute return funds are a diversifier, and that is what Octopus Investments investment director Oliver Wallin is coming to them for.

We are looking for a return profile that behaves differently to both equities and bonds, and absolute return funds can contribute to that aim, Wallin said.

We believe absolute return funds should form an integral part of any investment portfolio looking to mitigate equity market risk.

Wallin sees the Absolute Return fund sector maturing, with more funds coming to market, being better in tune with investor requirements and more accessible for UK based investors.

Many more funds are offering regulated structures, daily liquidity and more realistic pricing. The days of extortionate performance fees linked to low hurdles are thankfully over, he said.

Timing

So is now a good time to invest in absolute return funds?

Legg Mason multi-manager Wayne Lin believes it is not a bad idea to have a small, permanent allocation to absolute return funds in a traditional balanced stock/ bond portfolio.

But he is not recommending a big exposure in the current environment.

Given our expectation that global economic growth will recover and support most asset markets, investing in absolute return funds now could result in an opportunity cost, he said.

Wallin said he doesn’t invest in absolute return funds for speculative purposes, but as a means of delivering more consistent returns over the market cycle.

We’ve been investing in such funds successfully for the past five years and would argue the case for inclusion in a well-diversified portfolio, he said.

Event driven strategy

Old Mutual head of multi-manager John Ventre thinks now is a good time for certain absolute return fund strategies, such as absolute return fixed interest strategies, merger arbitrage and event driven ones as companies have large cash balances.

The case for Ventre’s last point is clear. Company cash reserves have been increasing steadily since the financial crisis of 2008. A report by Deloitte published last May found the top 1000 non-financial companies globally are holding $23trn in cash.

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