Page 47 - DIY Magazine March 2018

and then selling it with the aim of buying it back more cheaply when it’s price falls; sell Acme PLC for £1.00, buy it back at 90p, and you’re 10p up, minus any fee agreed with the party that ‘lent’ you the stock.
Short selling comes with more risk than buying a stock, because losses are potentially unlimited, but that is the expertise expected of the absolute return fund manager. By balancing baskets of long and short positions, the fund performance can be less correlated to overall market volatility; profits or losses in this scenario are delivered by the relative movements in the prices of these underlying stocks rather than the direction of the market itself.
This ‘market neutral’ strategy is a key feature of absolute return funds when compared with traditional ‘long only’ stock market funds which are diversified to help alleviate stock-specific problems, but can do little to limit the effects of a widespread fall in the value of the market other than retreat to cash.
At a time of great economic, political and social uncertainty absolute return fund managers will be diligent in assessing the risk to their portfolios of a whole range of potential scenarios and possible
outcomes; when considering a fund see how it is prepared for a rainy day – many will hold investments like government bonds or gold, to ‘hedge’ against a whole range of bad market scenarios.
The cost of such ‘insurance’ is that returns on such investments may be poor, thereby diminishing the absolute return in the title of the fund.
When seeking to make fewer mistakes, their opponents in this context are other absolute return fund managers; key to achieving an edge can be the ability of the fund manger to overcome behavioural biases to ensure
that they respond to new market information and
SHORT SELLING (‘SHORTING’) IS NOT COMMON IN FUND MANAGEMENT OUTSIDE OF ABSOLUTE RETURN FUNDS
opportunities in a way that is proportionate and in line with the objectives of the fund.
Alfred Winslow Jones is credited with forming the
first absolute return fund in New York in 1949 and in recent years they have become one of the fastest- growing investment products in the world; an absolute return fund should be able to comfortably beat cash and deliver the expectation of stable returns and diversification which has made them extremely popular as equity markets have appeared to be nearing the top and bond yields near the bottom.
According to a recent FE Trustnet study, the best absolute return fund - the Premier Multi-asset
Absolute Return Fund - would have protected investors 86% of the time in the nine years since markets
rallied following the global financial crisis; funds in the Investment Association (IA) Targeted.
Absolute Return sector have on average made positive returns in 77 months over the last nine years with 31 negative periods.
Those considering an absolute return fund should shop around - many of these funds do different things so it
is worth doing some research; some have aggressive objectives, and that can come with more risk than some investors may be comfortable with.
Fees are another consideration, as they can be relatively high when compared with other types of managed funds. Find more information here.
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47 DIY Investor Magazine | Mar 2018