The IA Targeted Absolute Return sector has been largely out of favour with investors since the high-profile decline of Standard Life's Global Absolute Return Strategies Fund (GARS). Once a market darling, GARS’ performance faltered, leading many to lose faith in the absolute return concept as a whole. However, dismissing the entire sector due to one fund’s shortcomings may overlook the potential benefits that absolute return strategies can offer in today's unpredictable market environment.
Here’s why investors should consider revisiting the IA Targeted Absolute Return sector:
1. A Diversified Approach in a Volatile World
One of the core promises of the absolute return sector is its ability to deliver positive returns regardless of market conditions. This flexibility makes it particularly attractive in times of heightened volatility, which many investors are facing now.
With uncertainty surrounding inflation, geopolitical tensions, and fluctuating interest rates, traditional asset classes such as equities and bonds are more vulnerable to sharp swings. Absolute return funds aim to provide uncorrelated returns by utilizing a variety of strategies like long/short equity, arbitrage, and multi-asset approaches, which can mitigate risk and diversify portfolios.
While the past performance of some funds may have disappointed, today’s investors should evaluate absolute return strategies within the context of modern markets where volatility and risk management are more important than ever.
2. The GARS Legacy: Lessons Learned
The downfall of Standard Life's GARS Fund undoubtedly shook confidence in absolute return strategies. After all, GARS was a flagship product, and its struggles with performance and outflows tarnished the reputation of the sector. However, it’s important to recognize that GARS' decline highlighted some key lessons for both fund managers and investors.
For one, the complexity and opacity of some absolute return strategies—often involving numerous, hard-to-understand positions—turned out to be a double-edged sword. While complex strategies can work in theory, they require flawless execution and continuous market adaptation. GARS' failure to adjust its strategy in response to changing market dynamics was a key reason for its underperformance.
Today, many absolute return funds have become more transparent and adaptive, learning from the missteps of GARS. Investors have access to a new generation of managers who are focused on delivering clearer, more consistent returns while offering greater insight into how these strategies are implemented.
3. Potential for Uncorrelated Returns
One of the most appealing aspects of absolute return strategies is their potential for delivering uncorrelated returns, which can serve as a buffer during broader market downturns. Unlike traditional equity or bond funds that are often driven by the same market forces, absolute return funds can employ a variety of tactics, including hedging and derivative strategies, to profit in different environments.
This diversification of strategy—ranging from long/short equity to currency hedging, options trading, and even volatility strategies—offers investors the potential for steady returns that are less dependent on rising markets. In periods where both equity and bond markets face pressure, as they have in recent times, absolute return funds can play a critical role in smoothing out the performance of an overall portfolio.
4. Tailored Risk Management
Another key feature of absolute return funds is their focus on risk management. Unlike traditional funds that are measured against an index, absolute return strategies often target a specific risk-adjusted return. This means they are designed to minimize losses during market drawdowns while capturing upside opportunities during positive market environments.
Many funds in the sector now focus on setting clear volatility and drawdown targets, which is appealing to risk-averse investors. By targeting absolute returns rather than relying on market performance, these funds offer an extra layer of security, particularly for those nearing retirement or others seeking to preserve capital in uncertain markets.
5. A Changing Economic Landscape
The global economic landscape has changed significantly since the GARS fund’s peak and subsequent decline. We’ve seen central banks shift from historically low interest rates to aggressive rate hikes, inflationary pressures building, and a highly uncertain geopolitical environment. These factors have created an investment environment where traditional 60/40 portfolios (60% stocks, 40% bonds) are no longer as reliable.
With bond yields rising but still struggling to keep up with inflation, and equities facing headwinds from higher rates and slowing economic growth, absolute return funds may offer a compelling alternative. Their ability to take positions that benefit from falling markets or sideways trading could help investors navigate a new economic cycle where long-only strategies may not be as effective.
6. A Wide Range of Choices
Not all absolute return funds are created equal. The IA Targeted Absolute Return sector offers a diverse array of options for investors, from more conservative funds focused on capital preservation to aggressive funds seeking higher returns through dynamic strategies.
Some funds within the sector focus on a multi-asset approach, blending various asset classes and adjusting allocations dynamically based on market conditions. Others specialize in equity-focused strategies, where managers go both long and short to capture returns regardless of whether markets are rising or falling. This diversity means that investors can tailor their exposure to suit their risk tolerance and investment objectives.
7. Regulatory and Transparency Improvements
The regulatory environment has also become more stringent since the days of GARS' dominance. Fund managers are now held to higher standards regarding transparency, liquidity management, and risk disclosure. These improvements mean that investors today can make more informed decisions and have clearer insights into how their absolute return investments are structured and managed.
Investors are now more able to assess whether a fund's strategy aligns with their expectations for risk and reward, and fund managers are under greater scrutiny to ensure they deliver on their promises.
Conclusion: A Sector Worth Revisiting
While the IA Targeted Absolute Return sector suffered reputational damage in the wake of GARS, it would be a mistake to write off its potential entirely. The lessons learned from past missteps, combined with improved transparency, risk management, and a dynamic economic environment, suggest that the sector is well-positioned to offer value to investors seeking diversification and uncorrelated returns.
As we move into an era of heightened market volatility, interest rate uncertainty, and changing economic conditions, absolute return strategies offer a compelling way to navigate these challenges. By carefully selecting funds with transparent strategies and strong risk management, investors can benefit from the sector’s ability to deliver steady returns, regardless of market direction.
For those seeking an all-weather investment strategy, it might be time to take another look at the IA Targeted Absolute Return sector.
Important Information
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