logged-in-corporate-menuYou are currently accessing Investment Week via your Enterprise account.

If you already have an account please use the link below tosign in.

If you have any problems with your access or would like to request an individual access account please contact our customer service team.

Our Funds to Watch Autumn Conference returns to Claridges in London on the 14th – 15th November 2019.

Investment Week is delighted to announce the annual Investment Company of the Year Awards 2019. Taking place on Wednesday 20th November at the Sheraton Park Lane.

The Gold Standard Awards have been recognising higher standards in Financial Services for the past 17 years. These awards are one of the toughest financial services awards to achieve, which also makes them highly respected.

The Sustainable & ESG Investment Conference returns on Friday 22nd November 2019.

Sign up to receive email alerts about our events

In this exclusive magazine exploring the evolution of quality and income ETF strategies, King reveals that each ETF follows an investment strategy developed by the groups in-house research team that leverages fundamental active insights to inform the factor definitions and applies portfolio construction principles to mitigate the unintended biases.

David Cumming, Aviva Investors chief investment officer for equities, last year witnessed turbulent times for UK equities but he remains positive about the market in which he has a personal as well as a professional stake.

logged-in-corporate-menuYou are currently accessing Investment Week via your Enterprise account.

If you already have an account please use the link below tosign in.

If you have any problems with your access or would like to request an individual access account please contact our customer service team.

It is likely that in 2008 volatility will remain high and spreads wide. Absolute return managers should relish this opportunity to generate alpha and demonstrate the flexibility of absolute return investing. By Anne-Sophie Girault, global product specialist – absolute return, ABN Amro Asset Management

Even without clear delineation and classification, absolute return funds have become very popular, very quickly. This product family has grown particularly rapidly over the past two years with EUR60bn assets under management (in Europe, end of November 2007) purporting to offer an absolute return investment strategy, and the asset management industry has clearly identified absolute return investing as being at the top of clients wish lists.

Until the TMT bubble burst in 2000, relative-to-benchmark investing was the name of the game. However, the subsequent collapse fanned a yearning for consistent, regular returns. That meant leaving the constraints of benchmarks behind and seeking ways of earning returns independently from market swings, highlighting the necessity to separate beta (ss) (return generated by the market) from alpha (a) (added value derived from the skill of the fund manager). In an absolute return style, the majority of the delivered return should be alpha, reflecting the skill of the manager. Absolute return investing seeks to generate a positive return, usually in excess of the cash or risk-free rate.

The challenge is to deliver the targeted performance objective over a sustained period. It should be noted that the minimum investment horizon for absolute return funds is at least 12 months; most should be viewed with a minimum 18 months or even more for the investment philosophy to bear fruit across market cycles. The acid test for absolute return investing could well be the current liquidity crisis, which has already rocked a number of absolute return funds.

While recent years have been mainly kind to long-only investors, they still offer clues as to how market environment influence absolute return funds. A lot of absolute return funds were launched when market volatility was relatively low and bond market spreads were very tight. In 2006 in particular, this presented fund managers with the challenge of shaping portfolios in such a way that promised returns were delivered. Moving forward, it is likely that volatility in 2008 will remain high and spreads wide. This environment should provide absolute return fund managers with greater opportunities to generate alpha, and thus demonstrate the flexibility and sustainability of this type of investing.

A further challenge revolves around fund classification and investor perception. Clients tend to see absolute return investing as part of the alternative category. This limits the allocation of assets to absolute return funds since usually the alternative basket is one of the smallest for retail and institutional investors. While this may change, being stuck in this bracket may cap absolute return funds ability to grow and come of age. While hedge funds are clearly in the alternative segment, the line between mainstream and alternative investing starts to blur when it comes to classifying absolute return funds, which can have Ucits III status. The much talked-about convergence – hedge funds borrowing characteristics from mainstream funds and traditional funds using hedge fund techniques – is already underway.

A key element of convergence is the success of traditional asset managers in the hedge fund space. This shows that the divide may be theoretical more than anything else. While traditional managers are borrowing techniques from absolute return funds, as allowed by new regulations, absolute return funds, in their effort to attract sceptical investors, are adopting more mainstream marketing strategies.

To enter the mainstream, absolute return funds will need to convince those investors still sitting on the fence. While some will only be convinced by the test of the time, most have either started to invest in absolute return funds or are considering doing so. The pragmatic investors, interested but hesitant, will be key in taking absolute return funds out of the alternatives box and establishing them in the mainstream investment space.

Correlation represents one of the chief concerns for absolute return funds. By combining independent and lowly correlated alpha sources during normal market periods, fund managers can benefit from diversification in order to deliver target returns while achieving an overall lower level of risk. However, in times of market volatility, correlations can rise sharply, and hence one can lose the diversification benefits achieved by combining the different alpha sources.

The absolute return investment sector is still in its infancy, yet it was sorely tried in the second half of 2007 and already in 2008. In the challenging environment of the past six months, it has become evident that not all absolute return funds were created equal. The vaunted benefits of diversification utilised in the investment processes of a number of absolute return funds have been called into question by events deemed statistically exceptional, which continue to put them to the test. Nevertheless, the keys to riding out such crises are likely to include robust risk systems, innovation in the field of research and the launch of funds suited to investors needs.

In recognition of the importance of this factor, ABN AMRO Asset Management has recently engaged in a project with the London Business School to perform further research on the subject, with the particular aim of learning to anticipate short-term changes in correlation. A strict risk-management regime is vital to the long-term success of absolute return funds, and risk management as a critical and integral element of absolute return funds investment processes – this is the correct approach to give clients the confidence they require to continue to consider absolute returns as a robust investment solution.

Absolute return investing is here to stay. However, market challenges, such as the events associated with last years liquidity crisis, will separate the men from the boys in the nascent absolute return space. Over the long term, performance will be the key differentiator.

– At the end of November 2007, there was EUR60bn invested with an absolute return strategy.

– In an absolute return style, the majority of the delivered return should be alpha, reflecting the skill of the manager. Absolute return investing seeks to generate a positive return, usually in excess of the cash or risk-free rate.

– Moving forward, it is likely that volatility in 2008 will remain high and spreads wide. This environment should provide absolute return fund managers with greater opportunities to generate alpha, and thus demonstrate the flexibility and sustainability of this type of investing.

Industry Voice: Chinese tech – fast-moving and ever changing

Former Fidelity multi asset CIO unveils new investment firm

Industry Voice – Timber: sustainable material, sustainable investment

Ruffer ups UK equity exposure as storm clouds clear

Diversity Blog: GSAM to address issuers diversity challenges in money market fund

Equity funds suffer worst-ever quarterly outflows

Deutsche Bank Wealth Management hires global head of wealth

Investors must rethink safe havens – JPMAM

Close Brothers AM restructure sees CIO Curtin depart

Gold has been a safe haven this year: Time to take profits?

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013