Absolute return funds: paralysed by choice
The high level of innovation in the absolute return sector is making portfolio construction quite complicated, according to Lonsec senior investment analyst Duncan Knight.
The Lonsec Australian Equity Sector Review found that disappointment with traditional benchmark tracking saw absolute return funds lead the way in innovation and growth over the last 12 months.
"Industry innovation now sees quality offerings coming to market that offer exposure to the Australian equity market without the limitations of being restricted to benchmark relative active positions," said Knight.
But putting together a portfolio with absolute return funds can be tricky, since some have very pragmatic designs while others are "necessarily labelled hedge funds", according to the review.
"The lack of homogeneity within the space, with product designs spanning from fully invested benchmark-unaware funds through to funds that are able to vary their exposure to the equity market, makes apples-to-apples comparisons difficult," Knight said.
As a result, there should be a 'handle with care' sticker on these types of products, he said.
But investor demand for absolute return funds and the fact that 'you can't eat relative returns' will continue to drive innovation in the sector, said Knight.
"Investors at or nearing retirement are beginning to look for outcomes-based, or real-return solutions, rather than peer-relative performance," according to Lonsec.
Investment managers will no longer be able to ignore 'peer risk', particularly if the equity market remains volatile, said Knight.
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