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Absolute return sector favours equity and multi-asset strategies

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Fund managers are increasingly turning to equity and asset allocation as the number of fixed income funds in the absolute returns sector falls, says Standard & Poor’s Fund Services in its latest sector review.

“Many fixed income funds that were core holdings in long-only funds-of-funds were subject to significant redemptions in 2008, and therefore the underlying absolute return funds had to liquidate positions in a very difficult market,” says S&P Fund Services lead analyst Kate Hollis.

“This, and the underlying credit bias inherent in many of the funds’ processes, led to very poor performance.”

Equity long/short managers did reasonably well in 2009, as most can and do take limited beta and sectoral exposures, which generally came good last year. Multi-asset funds, which are often long equities, also rebounded in 2009.

Funds such as Aviva Investors’ Absolute Return TAA Fund and Standard Life’s Global Absolute Return Strategies Fund did well in 2009 after suffering in 2008.

Absolute return equity long/short funds have a longer history in the UK than Europe, with BlackRock UK Absolute Alpha having just achieved its fifth birthday.

The move away from fixed income funds has led to more European equity long/short funds being launched, using different processes and with different targets. Blackrock, for example, will shortly have four different such funds run by three different teams.

Performance of the older funds in the absolute return sector continues to vary considerably, even between funds that seem very similar on the surface.

Hollis says investors need to continue to work hard to understand the risks inherent in each fund and strategy.

“Before selecting a fund, it is important that investors remember that absolute return funds vary considerably and understand which market conditions suit each strategy and each individual fund within that strategy,” says Hollis.

Most absolute return funds achieved their targets over Libor in 2009 and 2010 to date, partly because of exceptionally low Libor and partly because the market recovery in the last 12 months helped returns.

However, far fewer achieved their targets over three years cumulatively as most did poorly in the second half of 2008.

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