Clear sign of trouble for ARFs
Gone, it seems, are the days when investing in absolute return funds guarantees capital preservation and a good night's sleep.
Stephen Roberts of Taquanta Asset Managers says the returns on these funds (ARFs) could well be less than absolute in the face of ongoing market volatility.
This, he says, is what ARF proponents might have to grapple with for the first time since the funds were introduced.
Roberts says it's not surprising that ARFs have become increasingly popular.
He says while many ARFs are heavily invested in equities, in a bull market, this could be regarded as a good strategy since it allows ARFs to deliver far more than absolute returns.
But given the increase in the fuel price, rising inflation, electricity crisis and political uncertainty, a sustained downturn is possible.
This could draw the current bull run to a close, resulting in the truly successful ARFs being sorted from the wannabes.
Roberts says the clearest sign of trouble for the funds occurred in January, when the equity market fell about 15 percent and almost every ARF turned in negative returns.
It improved in February but dropped again in March - an indication that market volatility is likely to continue.
Roberts says ARF investors who truly want the certainty inherent in the concept of an ARF, need to ensure that their ARF incorporates a large proportion of assets that will give positive returns in all markets.
He says Taquanta's low risk ARF in the institutional surveys utilises a combination of enhanced cash and other low volatility instruments, and this has never resulted in a negative monthly return.
This significantly reduces the risk attached to the investment.
"With the rising risk of a period of sustained negative returns, the ARF sector could turn up some seriously disappointed investors," Roberts says.