Investors should scrutinise absolute return bond funds more closely, as many will not fulfil expectations, consulting firm Redington has claimed.
A recent wave of funds claiming to produce a positive return from bond investments in all conditions has led many investors to believe it is widely possible to do so, said Mitesh Sheth, director of strategy at Redington. However, investors should be aware that below the surface these funds host an array of different strategies—and will all produce different results.
“Long-only bond management does not easily translate to absolute return management,”Mitesh Sheth, Redington. “In the past two-to-three years, whilst the wholesale demand for absolute return bond funds has boomed, a lot of institutional clients have wanted more yield than these funds offered (especially against a ‘lower rates for longer’ backdrop) without the same requirement for capital preservation,” said Sheth in his latest blog. “This has led to another wave of product launches which are more credit intensive in nature and target a total return.”
Sheth warned investors that many of these funds were being launched by asset managers looking to “future-proof their business” and defend against a rising interest rate environment. This suggests that despite great skill being needed to construct and manage these products—a huge range of derivatives need to be used to consistently make the level of positive returns promised to investors—many offering them do not pass muster.
“When we recently sent out an absolute return bond request to the market we received more than 80 responses from managers offering a variety of products/capabilities,” said Sheth. “We screened most out because they were not fit for purpose and selected only four for new allocations. Long-only bond management does not easily translate to absolute return management.”
Sheth said there would likely be more funds claiming to produce absolute returns, so investors would have to be even more discerning in their choice.
To read the full article—and see where we stole this headline from—head to Redington’s blog site.
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