Absolute return funds, products that promised investors positive returns in all markets, are on track to record their worst-selling year to date after suffering poor performance during the coronavirus market shock.
European investors withdrew a net €18.6bn from absolute return funds, which include former blockbuster products such as Standard Life Aberdeen’s Gars fund as well as quantitative strategies run by AQR and BlackRock, during the first 10 months of the year, according to data provider Morningstar.
This is just shy of the €21.3bn that was withdrawn from the funds over the whole of 2019, making the sector likely to end 2020 with its highest ever annual outflows, said Morningstar.
The data covers European-domiciled funds categorised by Morningstar as alternative multi-strategy. These products invest in a range of assets and derivatives to achieve a set level of returns above cash irrespective of market conditions.
Francesco Paganelli, an analyst at Morningstar, said that investors were frustrated with the funds’ failure to shield them from losses during the coronavirus-induced sell-off earlier this year.
“[Absolute return funds] are meant to provide protection or good returns in periods where traditional asset classes struggle,” he said. “But most of these funds did not provide the crisis alpha that many investors expected in March.”
Absolute return funds’ recent woes raise further questions about the future of the products, which were once one of the hottest growth areas in asset management.
After experiencing huge asset growth in the aftermath of the financial crisis, the funds began to lose their lustre when they failed to deliver during the market turbulence of late 2018. According to Morningstar, assets in European alternative multi-strategy funds have fallen by more than a third over the past three years.
Although returns improved for some absolute return funds during the market recovery in the second and third quarters, Mr Paganelli said that the steep losses they experienced at the height of the turmoil had spooked investors.
The worst-selling products include the BNY Mellon Real Return, Aviva Investors Multi-Strategy Target Return and Gars funds, which respectively suffered performance losses of 15.5 per cent, 9 per cent and 7.5 per cent between mid-February and mid-March.
Invesco’s Global Targeted Return fund suffered the highest outflows in the category, with €2.9bn flowing out of the door between January and October. While the fund recorded lower losses than peers in March, its performance is negative year to date, said Morningstar.
Quantitative strategies such as the LFIS Vision Premia fund, run by French fund group La Française, and the BlackRock Style Advantage fund also bled money after their returns were hit by the poor performance of value stocks. The funds have lost 8.4 per cent and 22.5 per cent respectively, year-to-date.
Standard Life Aberdeen and BNY Mellon, whose funds’ year-to-date performance is now in positive territory, said that absolute return strategies would continue to play a role in portfolios as investors sought flexibility amid heightened market uncertainty.
Aviva Investors, whose fund is also up year to date, said it had faith in its strategy to deliver on investors’ long-term objectives.
Invesco’s Scott Thomas said his team had preserved capital in the first quarter of this year, adding that the fund would remain relevant especially as investors faced lower returns from traditional assets.
BlackRock said that while the overall sector had delivered on investors’ expectations, it was “inevitable” that some funds had underperformed due to the high dispersion among managers. La Française declined to comment.