In the rest of the world an absolute return fund means just one thing: a hedge fund. It is easy to understand that absolute return sounds a lot more palatable when hedge fund is often a euphemism for a Ponzi scheme. But in SA, until about two years ago hedge funds operated in a twilight zone. They weren’t allowed to be marketed, but if consenting adults chose to invest in them the authorities would not stand in their way.
So back in the late 1990s Coronation’s then head of marketing, Magda Wierzycka, decided to label the firm’s conservative, low equity fund as absolute return. Admittedly, it was not a dull, low-risk fund. Its fund manager, Louis Stassen, was and is one of SA’s best and most creative portfolio managers. Don’t take my word for it; his fans include Counterpoint’s Piet Viljoen, another highly individualistic investor.
Wierzycka now admits there is a lot of smoke and mirrors involved in the term absolute return. She says it was just a fancy name for a global balanced fund. Yet the name has caught on. Every month there is the opportunity to wade through 12 pages of tables in the Alexander Forbes Absolute Return Manager Watch Survey. Some fund managers have opportunistically slotted their more conservative unit trusts into this mountain of tables, sometimes in wrappers more suited to pension funds, such as life portfolios. Examples include the PSG Stable Fund, Truffle Low Equity (a clone of the fund it runs for Amplify), Old Mutual Stable Growth and Absa Absolute CPI plus 3%.
Momentum has clearly decided that the concept of absolute return has had its day. It has adopted the brand Outcomes Based Investment. Pity it couldn’t hire Wierzycka as its brand consultant — she is now chair of archrival Sygnia.
I am at least partly the product of outcomes-based education. At school in Vancouver, Canada, instead of explaining probability on a blackboard our teacher set up a mock casino and we played Craps all day. I understood what probability meant when I went home, although it did start a lifetime of bad habits.
My main concern is that there is confusion between absolute return and guarantees. A member of a pension fund is quite likely to believe that there is no point in investing in a fund that aims for inflation plus 3% when an inflation plus 6% is available. But there is a world of difference between a “Plus Three” fund such as Absa Absolute and a “Plus Six” fund such as Ninety One Opportunity. Opportunity is a very good fund and its manager, Clyde Rossouw, is just a few places down the Premier League table from his mentor, Gail Daniel, Stassen and Viljoen.
But I would not consider it to be a fund for anyone looking for rock solid financial security. It is, after all, a high equity fund, and over five years in more than 36% of calendar months it has produced negative returns. Not that it is out of line with other high equity funds. But Absa Plus 3% has had negative returns barely 3% of the time.
Over five years the Absa fund has given a 9.2% annual return, compared with 7.9% from Opportunity. Take that with a pinch of salt, though. It has been an unusually bad time to invest in SA equities and a better time to invest in the fixed income focused funds in the Inflation Plus 3% category.
Unlike its main Manager Watch survey, the Absolute Return Survey is not ranked by performance. For years there was an absolute and real return category for unit trusts that was also unranked. But that was until the Association for Savings & Investment SA (Asisa) cottoned on to the fact that absolute return was just a marketing label.
Funds should be able to stand up against funds with similar mandates. The simplest way to slice the market was by the amount of risk assets the fund was prepared to take on. So the funds were distributed between the high, medium and low equity funds as well as the new multi-asset income fund.
Most of these funds still control risk primarily by reducing or increasing their equity exposure. There is very little use of derivatives to protect asset values. And, more surprisingly, inflation-linked bonds are rarely used. They should be tailor-made for absolute return funds. Only Prudential, with its groundbreaking Inflation Plus Fund, really makes intelligent use of inflation-linkers.
Another obstacle is that multi-asset unit trusts are not yet allowed to invest in hedge funds, even though hedge funds have all been reclassified as collective investment schemes.
It is encouraging to see that many BEE managers, who used to operate exclusively in the equity space, now offer absolute return funds. Balondolozi and Mianzo operate CPI plus 3% funds alongside the more established Taquanta True Absolute fund — but what is Taquanta implying about its competitors with the word “True”?
Argon, Sentio and Mergence operate in CPI plus 4%, Vunani in CPI plus 5% with a timidly named “constrained” fund. Boards of trustees need to work hard and establish what is under the bonnet before offering anything called “absolute return” to their members.
• Cranston is a Financial Mail associate editor.
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