Q1. The Absolute Return sector has a variety of different funds with differing strategies – tell us a little about your fund strategy?
Absolute Insight’s approach is rather unique in the IMA Absolute Return sector. It is a Fund of Insight managed funds, with each of five component funds falling in the same IMA Absolute Return sector. As you mention, the sector is extremely diverse and it is important for investors to acknowledge that funds in the same sector can have very different risk characteristics. We recognise this through our own range of absolute return funds, each investing in different universes, using different strategies and managed by different specialist teams. Combining them into one fund means that we get the benefit of the diversification of the risks between the different strategies, with each strategy bringing a different characteristic to the Fund. The result is an absolute return fund with a high degree of diversification built into it, giving it the ability to deliver consistent returns in all market conditions.
Q2. The Fund has a very low standard deviation – how is this consistently achieved?
Yes, our standard deviation has been below 3% since the Fund’s launch in 2007. The low volatility is a result of two factors. Firstly, each of the component funds has an absolute return objective and therefore aim to provide attractive positive returns, with lower volatility than their respective underlying universes. Secondly, the correlations between the component strategies are very low, resulting in the Fund’s standard deviation being materially lower than the sum of that of the components. For example, the weighted sum of the standard deviation of the underlying funds is 4.0%, but over the same period the standard deviation for Absolute Insight was only 2.4%;in other words there has been a 40% reduction in volatility by taking our fund-of-funds approach.
Q3. Are there any particular market conditions that suit your fund?
The Fund is structured to enable it to have the potential to make money in all market conditions. This is achievable by allowing each of the underlying strategies to have a high degree of flexibility within a pre-defined risk framework, meaning they can be actively managed as market conditions continue to change. Active management includes the flexibility to increase or decrease the level of market exposure, and to cherry-pick selected areas within a strategy’s overall universe for investment. In line with our absolute return approach, active management also means the strategies can reduce market exposure by increasing hedge positions or by holding a larger amount in cash at particular time periods.
Q4. What areas are looking interesting at the moment?
As mentioned, we follow a fund-of-funds approach, where each component fund is managed by a specialist team at Insight. As these funds invest across different universes and use different strategies, they search for investment ideas in different areas. The equity market neutral strategy and equity absolute return strategy see opportunities in companies with higher growth potential, geographic or sector growth, with a negative bias to selected defensive companies, such as certain utilities and large cap consumer discretionary stocks, as these seem unattractively highly priced at the time. The currency strategy continues to observe the fate of the euro closely, timing when to enter and exit into the position carefully, along with a bias to North American currencies such as the US and Canadian dollars. Within the emerging market debt strategy we favour bonds issued in local currency, as we feel that there are still scope for interest rate cuts in emerging market countries given the slowdown in global growth. Finally if we look at our credit strategy, we see attractive opportunities in selected asset-backed securities, in particular within the German residential and commercial property sector, and in financial bonds.
Q5. What do you think the next 12 months holds for your Fund?
We intend for each of the component strategies to bring a different characteristic to the Fund. We believe the equity market neutral strategy should continue to provide stability with a strong focus on reducing risk to capital. The currency strategy is intended to bring diversification, particularly aimed at periods of market turmoil as it plays on macro themes in the economy. The final three strategies have flexibility to be more directional, and dynamic allocation takes place within them to allow for fast changing market conditions. We therefore intend that they will share in some of the market upside in the case of market rallies, whilst having portfolio hedges in place aiming to reduce risk to capital should markets be trending downwards. Our approach of investing across all of these strategies at the same time allows us to have a positive outlook over the coming 12 months, believing we can provide an attractive return independent of the general market direction.
The views in this article are that of the author’s and do not necessarily reflect those of Fiducia Wealth Management Ltd.
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