Lucas Financial Consulting Ltd

What is absolute return investing?

The concept is actually very simple. An investor with an ʻabsolute returnʼ strategy aims to generate positive returns in any stock market cycle – the fund manager does this by using techniques that enables them to profit from both the ups and downs in markets and stock prices.

Absolute Return Funds are different because…

In many ways its a ” Proper Managed Fund” whereby the fund manager is given a blank canvas and is asked to invest in assets that they believe will deliver positive returns and reduce volatility. In this way the fund managers are unconstrained and can use their expertise accordingly to achieve their goals.

Traditionally a fund manager is given a remit to manage an asset class from a specific region or sector, for example a fund made up solely of north american equities. This remit allows them to then buy shares in that region or sector- with a view to outperforming their peers or benchmark ( SP500 index in this instance). That’s all well and good – but if the fund manager fundamentally believes that north american equities are going to fall, they still have to hold them. In this instance their main concern is their fund doesn’t fall as much as their competitors. Some fund managers in the past have been pleased with a 20% fall as their “benchmark” has fallen by 26%.

In absolute return funds if a fund manager doesn’t like an asset class such as north american equities he doesn’t have to hold them – he may even “short” them aiming to make profit if the market falls.

What kind of returns can an investor expect?

The absolute return investor should not expect to make the sort of significant short-term gains that stock markets can deliver over a relatively short-term period. Conversely, absolute return funds should not decline as sharply as markets during periods of market correction. Generally, the sort of result that an absolute return investor can expect, is to beat cash deposits by an appreciable margin over a given period of time. But not all absolute return funds are the same….

What levels of risk is the investor exposed to?

Most absolute return funds aim to meet their objectives of generating positive returns in all market environments, over a rolling  period (typically 3 years). This type of investing takes a much lower level of market risk relative to traditional relative return funds such as managed funds. Absolute return funds aim to be uncorrelated to markets and other traditional asset classes, targeting lower volatility, demonstrating that the fund’s performance is not related to market movements but the result of the skill of the fund manager. It is important to note that these funds are not guaranteed – they do however aim to have a  short term volatility more consistent with fixed interest assets (such as Government bonds) but with the long term return closer to that of equities.

Warning : not all absolute return funds are the same. Different fund managers have different remits, goals, charges and may invest in a wide range of assets including derivatives. There are different risks associated with each fund as no two funds are the same. It is essential that you seek Independent Financial Advice if you are considering investing in these funds.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based near Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

Warning: The value of your investment may go down as well as up
Warning: Past performance is not a reliable guide to future performance
Warning: Funds may be affected by changes in currency exchange rates