Absolute return funds - sidestepping bonds

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The conundrum of 2011 can be summed up thus: If there is no new debt related crisis in 2011, and if China enjoys a Goldilocks transition (not too hot, not too cold), then the policy of the Federal Reserve can undoubtedly push stock markets and other asset classes higher - after all that is their stated aim, and so far it has worked.

However, as much can still go wrong many investors will not wholly commit to markets, a view with which we sympathise. But absolute return funds can provide some exposure to stock markets heading higher, while limiting the fall in value should markets take a tumble.

We are particularly interested in such funds which don’t rely solely or largely on bonds to generate their returns. This is because bonds have entered a more challenging period, and as we saw here it is important that our low risk bucket is less reliant on bonds going forward.

So in this section we are reviewing a number of such funds that can work in the current environment, and the table below shows the performance of these to December 2010.

For comparison we also show the UK stock market index, the average corporate bond fund and the Newton Global Dynamic Bond fund, a bond-linked absolute return fund with a wide mandate that continues to perform well. The Newton Real Return fund comes out on top over this period. Although it takes more risk than its peers, it is 60% less risky than the UK stock market (FTSE 100 index), but achieved two-thirds of the return of the FTSE 100.

The Newton Real Return fund, although multi asset, tends to have a long term bias to global equities, but will make big switches to cash and fixed interest. For example, it was 30% in cash ahead of the worst problems in Autumn 2008.

The other fund shown with a predominantly stock market link is BlackRock UK Absolute Alpha. It is somewhat less reliant on the direction of the stock market - its strategies enable it to make money when the market falls or goes sideways. This approach also means it is somewhat less risky than the Newton Real Return fund.

After an outstanding 2005-2008, the fund struggled in the conditions which prevailed from 2008. But more recently it has found its feet, and we are happy to re-introduce it.

Insight Absolute Insight is the least volatile by far (less than one tenth of the monthly risk of the FTSE 100 index), and generated a return some way in excess of deposit and inflation with a multi asset approach. The Standard Life Global Absolute Return fund employs a wide range of strategies across many asset classes.

All of these funds deserve your consideration within the low risk bucket.

6 months to 1st December 2010

(Taken from TopFunds Guide January 2011)

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