What place do Absolute Return Investment strategies have in the post-Covid paradigm?

CAMRADATA has published a new whitepaper, Absolute Return Investing which considers if this strategy can still generate positive returns for investors as the world moves through the pandemic.

The whitepaper includes insight from firms including Amundi Asset Management, Artemis, Unigestion, bfinance, Capita, Law Debenture and Local Pensions Partnership who attended a virtual roundtable hosted by CAMRADATA in October.

The report highlights that absolute return investing strategies – which seek to generate positive returns over time regardless of market conditions – should be able to thrive in the current market uncertainty.

However, the absolute return space has recently been hit by some negative press, with one fund closing after around £1 billion of outflows, while another firm has been questioned over its own beleaguered strategy.

Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “Unlike relative return, absolute return is concerned with the return of an asset without comparing it to another measure or benchmark. Returns can be either positive or negative and are generally considered uncorrelated to other market activities.

“With climate change, the pandemic and social inequality, current market volatility is set to continue for the foreseeable future; but absolute return strategies should be able to survive regardless. Our panel discussed the place absolute return strategies have going forward, plus also how managers are tackling inflation in their strategies.”

The consultants and asset owners at the event began by giving their definition of Absolute Return and its salient characteristics, before the panel turned to discussing the volatility of the market and understanding current economic conditions.

The panel then considered where Absolute Return strategies fit into total allocation and their role. The conversation then progressed to salient characteristics of less directional strategies, and ended with managers’ thoughts about the future, and in particular the threats posed by inflation.

Key takeaway points were:

• One consultant said for asset owners to understand Absolute Return better, they recommended thinking about it as a way of investing rather than an asset class. Providers of Absolute Return strategies could then be questioned on how they think about the world: whether their style is event-driven or a much broader quantitative approach.

• A manager said they didn’t believe Absolute Return strategies had fulfilled their own claims, adding that the vast majority of Absolute Return Bond (ARB) funds have suffered material downside.

• On volatility, another said that investors could help themselves by working through risk and return characteristics. But for any strategy or asset, investors can draw cone charts to work out where one and two standard deviation probabilities occur.

• To understand what was going on with current economic conditions, a manager said their team could not rely on official GDP figures and the like that are out-of-date for market practitioners by the time they are published.

• They said getting a timely read on indicators such as inflation and economic growth was challenging but they had developed systematic signals that incorporate various macroeconomic datasets such as retail sales, wage inflation, etc.

• A manager said that almost no manager has been unaffected by the down years, noting different drivers causing sell-offs in 2013, 2015 and 2018. This draws analyst attention to managers’ sell discipline in this kind of environment.

• They added that diversified alpha sources can certainly be beneficial in risk-on markets and provide room for manoeuvre in risk-off conditions, however without carefully considering the interconnections between them in the latter can catch managers short.

• Also, they find it hard to justify the claim that managers can consistently and repeatedly generate alpha, and are more interested in how they control beta in the construction of the portfolio. That means the focus is not on picking the right stock or credit, but how they put the entire portfolio together to maximise the beta per unit of risk.

• Another supported this emphasis and said genuine alpha is pretty rare, adding alternative betas, on the other hand, are not pure idiosyncratic risk.

• On threats posed by inflation, one manager said that inflation was the hardest macroeconomic indicator to predict. They saw it rising because the pandemic has seen governments taking dramatically greater roles in allocating capital and resources, which they do less efficiently than the private sector.

• Another believed inflation will be more transitory. They saw the trend to working from home as disinflationary, as it transformed commuting time into more labour hours.

• A final point by a manager who emphasised they don’t do long-term forecasts, was that their team had been wrestling with inflation, not least because in the last period when it soared – the 1970s – the world was a very different place.

• They said “the elephant in the room” for the global economy was China, notably its policy on capital markets and climate change. For those in finance seeking to understand Chinese policy, they highlighted the challenges of an opaque political system.

Additional insight is offered in the whitepaper with three articles from the sponsors:

• Amundi Asset Management: ‘The investment Case for Absolute Return Bonds’
• Artemis: ‘The Evolution of Absolute Return’
• Unigestion: ‘A Unified Approach for Systematic and Discretionary Investing’

To download the ‘Absolute Return Investing’ whitepaper click here.

For more information on CAMRADATA visit www.camradata.com