There’s nothing new about making money and absolute return strategies do just that, according to ARCO Investment Management Chairman, Bruce Loveday.
Loveday and ARCO portfolio manager, George Colman, told Money Management the method was not a new strategy nor an alternative strategy, but rather a tried, proven and growing strategy.
Loveday and Colman said the best way to grow wealth was to avoid losing it along the way, and protecting against downside risk and diversifying a portfolio was key.
Colman said the best way to protect against risk as an absolute return manager was to not be constrained by market benchmarks, and to actively manage risk settings.
“For example, some valuations in the financial sector in particular are stretched at the moment in our view, and with house prices under pressure plus the Royal Commission’s scrutiny on lending practices likely to put more pressure on credit growth, we are positioning our absolute return portfolio to take advantage of pricing retracement in some financial stocks,” he said.
Colman said absolute return investing limits investor drawdowns over time, and while the S&P ASX 200 has experienced some of the worst 20 months in terms of drawdowns, ARCO’s Absolute Trust has managed to either remain above the line or fall slightly into the negative.
Keeping a lower volatility is true to the nature of absolute return style investing, and the managers said they kept a volatility of around four per cent over the last ten years as opposed to the index’s volatility of 13 per cent.
Colman added that “getting rich slowly” involved removing market beta from the equation, and focusing completely on stock alpha, which is determined by stock price as opposed to the company itself.
“We’re also bearish on sectors that are overly dependent on local consumer spending and credit and bullish on stocks that have a clear and compelling ‘self-help’ story that will reward shareholders,” he said.
Data from FE Analytics shows the absolute return sector has returned an average of 7.24 per cent over the five years to last quarter end, 6.05 per cent over the three years to last quarter end and 6.43 per cent over the year to the same period.
The chart below shows the performance of the ARCO Absolute Return Trust as compared to the ASX 200 and the Australian Managed Investments – Absolute Return sector.
