Sponsored article


Is an absolute-return objective still relevant and achievable?


Suzanne Hutchins, investment leader, Newton Real Return team


Strategies which have non-investable, cash- plus targets as their benchmark, such as absolute-return and diversified growth funds (DGFs), have in recent years become part of the institutional investment land- scape, gaining particular popularity in the wake of the 2007-2008 global financial crisis. Such strategies encompass a


disparate


range of approaches. Some are managed more like hedge funds; others are relatively complex vehicles with derivatives and syn- thetic exposures; others are more akin to traditional balanced portfolios. They typi- cally share an objective of seeking to partic- ipate to some extent at times of rising asset prices, while limit- ing drawdowns and volatility. In considering why, in the after- math of the financial crisis, investors thought that absolute- return strategies were a useful addition to their asset distribu- tion, one needs to recall that a decade ago it looked as if the investment world had changed irrevocably. Future expected returns appeared likely to be more muted, with clients no longer able to rely on the equity market ‘trend being their friend’.


which capital preservation is typically not an aim.


As it turned out, the credit crisis was in fact the catalyst for an historic bull-market run. Low interest rates (and sometimes zero interest rates), negative interest rates and quantitative easing have suppressed the yields


of traditional ‘safe-haven’ bond


investments, encouraging investors to migrate into riskier assets, with policymak- ers hoping that this would reflate the real economy. Against this backdrop of a relentless ‘hunt for yield’, and despite a number of subse- quent scares, investors in risk assets have


This is generally the


equities. High-yield credit has experienced similarly robust returns over the same period, while various bubbles have formed in assets such as property, commodities, and even cryptocurrencies. Given this recent ‘super-normal’ return experience, it is perhaps not surprising that investors question the utility of strategies which aim to limit risk of capital loss and target a cash- plus return.


phase when vested interests pronounce that ‘this time is different’.


This seemed to necessitate an active, flexi- ble approach to investment management, and a focus on an upward-only target rather than a relative benchmark in relation to


enjoyed one of the longest economic cycles in history, with strong returns available from a portfolio of global risk assets, par- ticularly when viewed from a weak currency base such as sterling. For example, the MSCI All Countries World index has returned around 13% per annum in sterling terms during the past decade, but such asset-price inflation has not been limited to


WHERE ARE WE NOW? However, in an investment environment that remains increasingly uncertain and distorted, can such super-normal returns be sustained? We would contend that the current backdrop has a ‘late-cycle’ feel. This is generally the phase when vested interests pronounce that ‘this time is different’. Well this time is certainly unusual, in that mon- etary support for markets has become a permanent feature. If the zeitgeist of the bubble of two decades ago was the potential for a ‘technological revolution’, and a decade later it was the finance sector’s mastery of lev- erage, the current boom is based on central-bank policy always being on hand to sup- port asset prices on any signs of market distress.


Our thesis remains that it is highly unlikely that the cycle


has been abolished, and that the persistent stimulus over an extended period has mag- nified the feedback loop between the econ- omy and the financial system. A combination of ever-increasing debt lev- els (and the misallocation of capital that this implies), high valuations (implying low expected returns), investors who have been


42 | portfolio institutional | September 2019 | issue 86


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6