The latest bout of share market volatility highlights the need for investors to consider the role of absolute return strategies within a balanced portfolio, according to Henderson’s Head of Alternative Australian Equities.
“Volatile investment markets have seen the re-emergence of absolute return funds as investors refocus on capital preservation.” David Rosenbloom, Henderson’s Head of Alternative Australian Equities said.
“In markets like we’ve experienced over the past few weeks, and in fact years, alternative investment options which better manage risk and smooth out returns, are becoming increasingly attractive.”
“By following the traditional investment thesis of diversifying across stocks, investors can effectively become 100% exposed to market risk – which is not the desired position for many Australians, particularly older investors.”
Absolute return strategies seek to deliver positive returns in both rising and falling markets, with little or no correlation to traditional asset classes.
A real alternative
Mr Rosenbloom believes absolute return investing will become the next major trend as investors, especially those near or in retirement, continue to increase their allocation to alternative investments to diversify and protect their portfolio.
“Absolute return investing started largely in the domain of sophisticated investors such as institutions and family offices but we are now seeing a wider range of self-directed and SMSF investors recognising the benefits,” Mr Rosenbloom said.
“There have been significant market changes over the past three years, from large declines in commodity prices and the Australian Dollar, to the continued flight to yield by many investors. In this environment capital preservation has become a key theme.
“As alternative investments become more transparent, and more liquid, investors recognise the value of investing in assets that are less correlated, can provide protection on the downside and deliver stable returns across all market cycles.”
Henderson’s Absolute Return Australian Equity Fund (‘Fund’), recently added to the Macquarie Wrap and Netwealth platforms, seeks to generate equity market returns through all market cycles with significantly lower volatility, and a primary focus on capital preservation.
The Fund reached its three year milestone at the end of May 2016. Its performance reflects the benefits of true absolute return investing, especially in periods of high volatility. As of 30 June 2016, the Fund has returned 10.3% p.a. (net of fees) since inception, significantly outperforming the S&P/ASX 200 Accumulation Index return of 4.9% p.a. over the same period.
In the past year, performance has been even more significant, with the Fund returning 13.6% p.a. (net of fees) versus 0.6% p.a. for the S&P/ASX 200 Accumulation Index.
“Relative returns attract attention in rising markets, but beating the market on the way down doesn’t ease the pain for investors,” Mr Rosenbloom said. “With market volatility seemingly becoming ever more regular, investors now more deeply understand that there are alternatives in the market to help smooth this cycle.”
