QROPS ADVICE: Spotlight on Absolute Return Funds

Being a relatively new type of asset, you would be forgiven for not knowing a great deal about Absolute Return funds, although recent market volatility has ensured that they have quickly become one of the most popular investment choices around, with the majority of the world's biggest fund managers having such a fund in their range.
A fund manager running an Absolute Return strategy aims to generate positive returns in any stock market cycle, by deploying techniques that are able to profit from both the ups and downs in markets and stock prices. The opportunity to use such techniques is relatively new and is possible as a result of an EU Directive introduced in February 2007; UCITS III (Undertakings for Collective Investments in Tansferable Securities). A major effect of the directive, in addition to where a fund can be marketed, is to allow greater flexibility in the investment powers of the manager.
The general concept is not too dissimilar to traditional pension funds, which retreat to defensive, fixed interest investments as the client's risk profile gradually becomes less adventurous. Or a 'mixed asset' fund, that can hold both equity and fixed interest-based investments dependent on market conditions (albeit at set, prescribed amounts in accordance with the fund's constitution). Each of these types of funds will make a profit when the value of the assets into which they invest increases, however, being able to make a profit when the value of such assets decreases is what distinguishes Absolute Return funds from their traditional counterparts.
Generally, there are two techniques employed to achieve this. The first is to use 'short selling'; this is selling a stock that is not owned by the fund manager hoping the price will go down, then buying it back at a lower price to settle the trade, making a profit on the whole transaction. The second technique is using the wider asset types now available and diversifying with supposedly non-correlated assets, using the 'if one goes down the other goes up' approach. The one great advantage of the funds is the manager's ability to give protection in falling markets by using derivatives, which is not possible with funds that don't take advantage of the UCITS III rules.
Such is the popularity of Absolute Return funds, figures released by the UK's Investment Management Association show that that the Absolute Return fund sector was the highest selling sector in September 2009 - accounting for GBP442 million of net retail inflows, and overtaking the Sterling Corporate Bond fund sector which had spent 10 consecutive months at the top of the sales chart.
Most Absolute Return funds will concentrate on a particular asset type or geographic focus, Vincent Devlin of BlackRock Investments, Manager of the recently launched Hansard BlackRock European Absolute Return Strategies Fund (MX51, available in HIL and HEL) commented on the outlook for the European-focussed fund in 2010, "We expect market returns will continue to be driven by stock-specific factors and we are focusing our fundamental research on companies where there is a likelihood of earnings upgrades. In our view, this environment is well suited to our bottom-up fundamental investment approach."

Contact 01664 444625 to discuss you investment requirements or email derry.thornalley@aifsg.com