Absolute return: a smoother path to long-term growth

June, 2012 Print


Jo Fidling, Director, Local Authorities, Insight Investment.

There are few investors who don’t mind losing money. Many, given the choice would give strong consideration to an investment that offers an above average level of protection when markets fall, as well as providing participation in some of the upside when markets rise.

The introduction of UCITS III back in 2002 enabled mainstream pooled funds to invest in a wider range of financial instruments, transforming the market. In the years since this regulation was passed there has been an abundant supply of new products taking advantage of these new tools, many of which are designed and marketed as “absolute return” funds.

However, as the number of absolute return funds in the market place has increased, a significant number of these are now being criticised for not delivering the positive returns they promised.

At Insight, our focus is on developing solutions that help clients achieve their goals. We are specialists in managing funds that seek to deliver growth in asset values irrespective of the prevailing economic environment. Our range of absolute return funds, including the Absolute Insight range and the Insight Broad Opportunities Fund, have achieved their objectives of providing positive returns over three and five years.

The funds are designed to capture the “best ideas” for investment in their respective asset classes. They use a wide variety of investment techniques, including derivatives, to generate lower levels of volatility, thereby capturing upside whilst seeking to minimise downside risk.

Within the right risk management framework, we believe such investment techniques are a very powerful tool that can improve riskmanagement and enhance returns, providing a smoother path to achieving the desired outcome (Figure 1).

This is an approach that contrasts starkly with traditional indexbenchmarked funds. These funds usually mirror the movements of their market to a very high degree, both to the downside as well as the upside. Of course this does not mean that absolute return funds cannot and will not ever lose money, especially over the short-term. But over the long-term, investors should expect less volatile performance compared to a fund run along more traditional lines.

Insight’s range of absolute return funds. We offer a broad range of absolute return funds. Here we focus on those which invest on a multi-asset basis, as well as in credit, emerging market debt, UK equities and global currencies. While each fund offers a different risk profile and return target, to suit a range of client needs, they all have the same common goal, and that is to deliver attractive, risk-adjusted returns regardless of market conditions while at the same time demonstrating lower volatility than more traditional approaches.

Insight Broad Opportunities Fund. The Insight Broad Opportunities Fund utilises a dynamic multi-asset approach to target an absolute return of 4-6%pa (gross)2 in excess of cash. The fund can invest across a broad range of asset classes including equity, fixed income, total return, commodities and property. Importantly, it has the ability to allocate a significant proportion of the portfolio to “opportunistic investments” where the managers can identify specific investment opportunities, including relative return positions and incomegenerating strategies. Our approach offers our fund management team the freedom to adjust asset allocation swiftly according to the prevailing market environment, helping reduce drawdown risk and improve overall risk-adjusted returns.

Absolute Insight Credit Fund. This fund combines Insight’s longestablished and robust fixed income investment process with a multistrategy approach to identify opportunities across the credit spectrum. The fund’s universe extends beyond investment grade corporate bonds to high yield, asset-backed securities, convertibles, loans, as well as derivatives. The fund aims to generate the majority of its returns from alpha but can also take exposure to the direction of the underlying market if the team believe this would be beneficial for returns. The fund targets a return of cash plus 5-7%pa (gross) .

Absolute Insight Emerging Market Debt Fund. Emerging market debt (EMD) is growing in appeal among investors seeking new sources of return. With over 50 countries offering government and/or corporate debt in either local or external currencies, there are multiple prospects for investment. Our absolute return EMD strategy targets a return of cash plus 4-6%pa (gross) 2. Our approach seeks to reduce the volatility that can be experienced in the asset class, thereby reducing the risks associated with the timing of the investment decision. Our emerging market debt fund combines “topdown” macro-risk assessment, with “bottom-up” credit assessment, seeking to target or remove particular risks and characteristics in the emerging market bond market.

Absolute Insight Currency Fund. The Absolute Insight Currency Fund seeks to provide an uncorrelated source of alpha by exploiting opportunities created by the relative supply and demand for global currencies. These opportunities can be both tactical in nature as well as providing exposure to longer-term structural themes. The fund uses a full range of derivative instruments, including futures, forwards and options, to target and remove particular risks to provide a smoother path to long-term growth regardless of market environment. The fund’s return target is 4%-6%pa (gross).

Absolute Insight UK Equity Market Neutral Fund. This fund invests in UK equities, but on a market neutral basis. The fund’s managers seek to identify stocks that are mispriced relative to similar stocks on the broader market. Positions are then implemented through paired trades, whereby every investment, whether long or short, is matched with an appropriate hedge; this focuses the fund’s exposure on specific risk factors while minimising others. Our approach is designed to provide a smoother path to long-term growth, generating positive returns while seeking to minimise volatility. This fund has the lowest risk/return profile within the Absolute Insight fund range, with a performance target of 3%-4%pa (gross).

Why Insight Investment for absolute return? Insight Investment has a strong track record in managing absolute return funds. We were among the first to take advantage of the increased flexibility of the UCITS regulations to bring a full range of regulated absolute return funds to investors. Launched in 2002, Insight is responsible for assets under management of £170.2 billion4, across absolute return, multi-asset, fixed income, liability driven investment, cash management and specialist investment strategies.

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