There are several “absolute return” mutual funds in our portfolio. Absolute return strategies have a target rate of return of, say, 8%, that is stand-alone….it is not relative to an index… it is simply trying to achieve 8%, no matter what stocks or bonds or oil prices or corn prices or interest rates do during that time.
Absolute Return(AR) funds aim to reduce losses by playing the long, or bullish, side of the stock market, but also selling some shares short in case the market falls. This is sometimes also called Long/Short Equity Funds. Every fund manager develops a pricing forecast, and adjusts the “bias” his fund employs based on his/her forecast. In other words, is he devoting more resources to capturing upside, or protecting against downside? Their success during many market cycles earns them a place in our portfolio.
This approach is not a hedge fund, but it does mimic one. Mutual fund regulations demand transparency, prohibit leverage, and subject these types of funds to many more rules than the hedge funds. As you might imagine, this type of strategy, coupled with leverage, could greatly exaggerate the potential for gain and loss, and this is what real hedge funds are famous for doing. Not so in a publicly traded mutual fund.
Absolute Return funds are not new…they have been used by institutional investors for a long time. A 1997 SEC rule change prompted the retail launching of these funds. Fund giants Vanguard and Fidelity don’t currently offer them, but several institutional hedge funds have launched retail versions to attract a wider audience.
Absolute Return funds have a risk profile that is similar to bond funds, but unlike bond funds, the objective is a continuous positive return. Absolute Return strategies are actually less volatile than long term bonds, and have greater potential growth. It is these attributes which attract us as advisors, and why we feel this approach belongs in a diversified portfolio, especially in older investors, but really for anyone seeking a less volatile investing experience.
Investing in Absolute Return mutual funds requires that you do your homework. As with all mutual funds, a manager’s track record is important, as is the philosophy and outlook of the fund. Expenses, too, should be scrutinized. Although this category of investing does not carry exorbitant costs, it needs to be part the decision as to who manages this sector of your portfolio.
We have 8 funds that we have approved for portfolio use, and from January to June of this year, they have returned on average 5.26% . Not bad, considering the stock market has been extremely volatile and returned a little over 3% during the same time period. We are believers in Absolute Return investing, and forecast it will be part of our strategy for some time.
