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A Review Of Absolute Return Funds in Ireland – Blog 133

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A Review Of Absolute Return Funds in Ireland – Blog 133

13th January 2020

Paddy Delaney

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A lot of folk, mostly at the encouragement of some advisors, decided to invest in Absolute Return Funds in Ireland. While they promised a lot, many of those same people are now questioning the decision to do so. This week, on Ireland’s #1 Finance Blog & Podcast I hope to help you understand what they are, why their performance have been pretty rubbish, and whether they are worth staying in or not! This is an un-biased(ish) review of absolute return funds in Ireland. I hope it helps.

Before I do, quick note to let you know that our Inaugural Investment & Retirement Planning seminar is ‘live’ and available here. Happening in a few short weeks – there are a handful of tickets left, grab one today if you would like to join us on the day, in this magical venue of Cliff at Lyons! Special guest is Tony Gilhawley, one of Ireland’s uttermost pension experts – so you won’t just be listening to boring me! Tickets here.

What Are Absolute Return Funds?

Absolute Return Funds came onto the scene approx 10 years ago. My take on it is that these funds were something shiny and new for some advisors to sell – and so they sold a lot of them. With the bold claim that they would do ‘the impossible’ of delivering positive returns no matter what the markets were doing was just too easy an empty promise to make. As a result there are thousands of people here invested in them. From a performance perspective at least, they’ve been bad bad bad.

If investing in most funds, whether index funds, or funds of funds thru an investment manager, they will likely hold the vast majority of the underlying assets for the long-term, in the expectation that the value of those assets will increase over time. With Absolute Return Funds however, they invest a significant portion of the funds in assets that they hope will increase if most other assets are falling.

Absolute Return Funds in Ireland – Complexities

Absolute Return Funds use a lot of very complex strategies to try achieve this feat of positive returns when everything else is temporarily heading south. They employ strategies such as short selling, futures, options, derivatives and leverage. All of these are unconventional and the tools that most hedge funds would use. Gordon Geko stuff.

Standard Life Global Absolute Returns Fund or GARS for short – across UK & Ireland was one of the biggest funds of all, with a reported £65BN invested in it at one point. It has come to fame recently due to 5 years of poor growth and a lot of media attention!

Standard Life tells investors that the fund “aims to provide positive investment returns in all market conditions over the medium to long term”.

The Gars fund uses derivatives to “short” some stocks and markets – in other words, make a bet that the price is going to fall – while going “long” in others. By any measure these are among the most complex funds sold to investors, based on what we have seen.

Here’s another line I came across in the description of one of these funds; that the fund is invested in a number of “relative value strategies”, including a “Swedish flattener v Canadian steepener”, while its “directional strategies” include “Long INR v CHF”. (INR is the Indian rupee and CHF is the Swiss franc). Heaven help us.

If you don’t understand something, even the basics of it, don’t invest in it. I would not be surprised if vast majority of people who are invested in these things have no idea how they work – nor many of the advisors that sold them. Having said that, if Absolute Returns Funds work, then many investors might not care, right!? But do they work – let’s see!

Absolute Return Funds in Ireland – Have They Delivered Returns?

5/5/16 to 10/01/2019 Absolute Return Fund Performance Data From F/E Analytics

The above lovely chart shows the main Absolute Return Funds in Ireland. It charts their performance since May 2016. €100,000 invested at that point, on 5 of the 6 funds you have less than €101k today. When you take into account the likely 2% annual fee you are paying, and the impact of inflation, you are down down in real terms. Mercer fund is the only one in which you have gained anything in Gross terms, you are up 15% on where you were in 2016.

Our next chart, above shows those same Absolute Returns Funds over the same period of time, however I have added a simple and conservative Equity and Bond portfolio fund for comparison. The green line (yes the one that goes up more than the rest of them) is that 50/50 Equity/Bond portfolio. You really could not get more simple an approach to a conservative investment – and it blew the Absolute Return Funds our of the water. The €100,000 final value on that portfolio being €132.7k. If 50% Bonds is not conservative enough to make the point…..

Absolute Return Funds & Simple Index Portfolio May 2016 to Jan 2020

Same graph again, except this time I’ve thrown in a pure Bond fund – 100% simple Bond index. Final pot value on that one was €104.4k – smashing majority of Absolute Return Funds. At a fraction of the cost, zero complexity, zero smoke and mirrors – hammers the complex, expensive and over-promising Absolute Returns Funds.

Absolute Return Funds in Ireland – What Do They Cost?

Even their most ardent supporters would have difficulty arguing that these funds do not exist solely to generate sales, and to generate fee income. On the face of it they seem to offer little else to anyone. If you invested €100,000 in one of these 3 years ago, you have paid in the region of €6,000 in fees within the fund, and you have lost some of your capital – while the parties involved in providing it and selling it have collected €6,000 and lost nothing! There has been only 1 winner it seems. You will pay your 1.5% to 2.5% of your assets every year in fees irrespective of how well these complex tools perform on their promises.

Another cost that I suggest you consider – not for the purposes of beating oneself up, but in assessing the costs, is opportunity cost. Aside from the murky internal fees you pay, it’s worth considering what it cost you in opportunity, to invest in this versus another suitable option. For example, had you invested in this instead of say a conservative 50/50 Equity/Bond portfolio, you have missed-out on a final pot value of €132k. Put another way the Absolute Return Fund cost you €32k in missed growth. The opportunity cost has been a whisker under €50k versus a 90/10 Equity/Bond portfolio, but you probably didn’t want to hear that.

What is the lesson to be taken from that? There are many I guess – one of the main ones being that; complexity in investing might sounds great, might make you feel that the provider knows what they are doing and has really come up with something robust, but in reality it so very seldom actually works out for the end investor. While the provider sold billions and billions of the stuff.

Have They ‘Worked’ During Market Declines?

Absolute Return Funds & Bond Index Comparison – in decline period

From the above graph, plotting the temporary market decline between September 2018 and January 2019, we can observe several interesting points:

  • Absolute Return Funds did not achieve positive returns
  • Absolute Return Funds all lost you money in that period
  • Absolute Return Funds did not achieve positive returns in declining markets
  • The Bond Fund did best in the time frame of September to March
  • The 50/50 Equity Fund had the sharpest decline, followed by the sharpest ascent – as expected

Absolute Return Funds In Ireland – Conclusion

Maybe you know something the rest of us don’t; maybe they are in for a major upswing of some sort driven by Indian Rupee hedge, or Mongolian Cave Art futures. Maybe there is light at the end of the tunnel. A lot of ‘maybes’! If there is some glimmer of logic for remaining in these funds then it might may sense to keep invested, and keep paying the fees you are. Without understanding or seeing that glimmer, it’s hard to come to terms with why one would decide to stay.

Only a few more tickets left for the upcoming Investment & Retirement Planning Seminar with me, and Tony Gilhawley – grab one here today…if you wish!

Paddy Delaney

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