Argonaut Absolute Return – Do these types of funds work?
Absolute return funds like the Argonaut Absolute Return fund usually aim to produce an investment return in all types of economic and market conditions.
Some investors will use them as part of a diversified portfolio in the hope that when other investments in their portfolio go down their absolute return funds will go up. This could therefore lessen the impact of declining markets.
How do funds like the Argonaut Absolute Return fund do what they do?
Absolute return funds will use complex investment trading strategies to achieve positive returns whilst other straightforward equity funds deliver negative returns.
They effectively bet against the overall market or certain sectors in the hope that as the market falls, their bet wins.
Let’s look at an example.
Perhaps you think the banking sector is looking in a bad way and you believe a number of banks are about to go bust. You could bet against them (called shorting).
If your prediction comes true you will actually make money as the banking sector falls in value whilst a normal investor in banking stocks will see the value of their stocks fall.
You can find the latest positions that the Argonaut Absolute Return fund has taken in its factsheet.
If funds like the Argonaut Absolute Return fund work, why use anything else?
If the Argonaut Absolute return fund and others in its sector do what they say on the tin then why would you invest anywhere else?
A positive return in all market conditions does sound pretty appealing, right?
Well, actually history tells us that absolute return funds don’t actually achieve a positive return in all market conditions.
If we look at the Argonaut Absolute Return fund in particular, it saw negative returns of 25.6% in 2016 and 11.7% in 2018 meaning it did not achieve its stated aim of positive returns over a rolling three year period.
Why is this?
Well if you are making bets all the time, can you guarantee you will always be right?
Remember when it comes to investing there is always a buyer and a seller. You might think it’s right to buy but when purchasing your shares or units a seller has taken the opposite view to you. Can you trust you will always be right?
So absolute return funds are actually one of the most misleading adverts in investing. How does the financial regulator allow them to call themselves this?
In fact, if you compare the absolute return sector with the normal global equity sector you will see that global equities have more than doubled the performance of absolute return funds over the last 30 odd years.
This could have made a massive difference to someone investing during their working life.
In the main, you could argue that absolute return funds have done a good job at limiting volatility but in order to achieve this you may end up giving up growth.
If you are in the early stages of your investment journey then the evidence shows that you will be better off, in the long run, investing in a global equity fund. A fund that invests in the great companies of the world.
Take a leaf out of world-famous investor Warren Buffet’s book when he says “Never invest in a business you don’t understand”.
Better still why not look at a fund that invests in the great up and coming businesses of the world instead?
Again history tells us that smaller companies tend to outperform larger companies over the long term as they have more potential to grow.
Carl Roberts, Director
If you want to learn more about this topic, please find the link here.
For more information about our fund the YFS Intelligent Wealth Fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
