A reader is Greece forwarded along this link from the WSJ about absolute return OEFs. First, thanks for the link.
The idea of absolute return is interesting to me and may become more important in the next few years, or maybe this year.
The article is more about demand or future lack of demand if there is an up a lot year and less about mechanics and strategy.
The concept as I understand it, is to target a certain return and doing what it takes to achieve that return regardless of what is happening in the world. For example a target of 2% above inflation might be the goal of a this type of fund (although I don't specifically know if any of the funds actually have that as a goal).
There are not too many funds like this yet but the article says a lot are in the works.
I would categorize these similarly to closed end call writing funds. Both reduce volatility in a portfolio, perhaps offer a little bit of yield and should lag a raging bull market.
If this appeals to you I would say to wait a while until there are more of these out there. There is one CEF that might fit into the absolute return category, the Old Mutual Long Short Fund (OLA).
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7 comments:
I have been looking for absolute return funds for quite a while. Pimco All Asset Fund(PASDX) is not usually classified as absolute return. However, its bench mark is CPI + 500 basis points employing futures and bonds to reduce risks and increase returns. As of last week PASDX has YTD, 1 yr and 3 yr returns of 6,11 and 13%. It has a very low standard deviation of 7.7. I don't know how does it compare with other absolute return funds. I am happy with its return/risk profile.
Roger:
Maybe I'm missing something, but setting a goal, and then doing whatever is necessary to try and meet it strikes me as a formula for disaster. Some years returns are anemic and though the lucky or good might find sectors that succeed this is just about traditional judgement.
To announce that you have tools in your pocket that can somehow up the returns to what you wanted seems silly, if you had them and knew they worked you would use them.
This sounds like a process of adding risk when things go poorly. Yes risk can dramatically increase returns, but it can do the opposite, that's why it's called risk. And I believe it tends to be most risky in poor markets. Good markets can save even bad choices.
So what I see is more of people doing everything they can to try and get really good returns when the market as a whole is not bringing them, like this paying igh prices for junk bonds etc. I don't have a WSJ subsription but I've heard this concept before roughly described as you did. It makes it all sound so easy and reasinable, "we will work for a set return (often modest by nineties standards) and if things go wring we will work harder and bring out our little tricks and grab that extra profit."
How?
- confused
to confused,
I view these funds as a tool. The tool may or may not be right for any one person. Like all tools it would, at most, play a role not be your entire portfolio.
I would say that at differnt points it might make sense to go for index reutrns and at other times absolute returns.
This year I upped exposure to dividends, thinking we would be lucky to be up mid single digits. Client accounts are up about 7% this year as of earlier today. I have tried to un-index client accounts, more of an absolute. Nex year or the year after I may go back to being closer to the index.
This type of rotation seems logical.
PIMCO All Asset Fund is actually a fund-of-funds that can use a number of PIMCO funds, the real return strategy funds in particular (up to 75%). Its own expense ratio is good - institutional shares (PAAIX) have an 0.8% expense ratio per prospectus but only 0.21% per latest annual report - but w/ the expenses of the underlying funds nibbling away at total return it would seem to make sense that an 'absolute' return benchmark be part of the mix even if that were not the fund's core strategy (CPI+5% is the fund's secondary index).
In interviews the fund manager, Bob Arnott, seems extremely capable; a real hard-core 'quant' (e.g. http://www.allianzinvestors.com/commentary/mkt_managerQA09282005.jsp ). So far the fund has been performing pretty much as advertised and personally I consider it stable overall and ideal for a low return environment.
Disclosure: I own shares in the fund but have no other interest, affiliation, etc.
RW
Arnott is pretty much rocket scientist.
Going through google some define absolute return funds as hedge funds and claims 600 billion worth, another page claims that results are evaluated within 3+ year time frames while a marketer claims 3 months.
I don't consider Pimco a fund of the type that "sets a goal and does whatever is necessary to meet it." Pimco tries to mnimize risk and under current conditions has reduced equities and hedged others. If the spx rises it admits it will be below alpha.
This might be a hedge fund in a sane sense, but someone who says we'll beat spx by 2% and do whatver it takes to do it is IMO entering into a risky game.
As many hedge funds have.
But since there is a conflict of definitions about what these absolute return funds are I remain
- confused.
Beating S&P 500 2% a year can be achieved quite easily if we use hindsight 20-20. One way to do it is to choose a really good balanced fund(PRWCX beat S&P 500 in all period returns and yet has a lower risk). Another way to do it is just useing a good small cap value index(DFSVX, for example). You see where I am driving!
But the important point is beating S&P 500 by 2% does not give you much value these days. Would I be happy with 2% TYD return and telling my clients that I beat S&P 500 by 2%. No, of course not. My goal is to beat CPI by a fixed %, regardless of the major market index. Hence I belong to the camp that goes after absolute return. Using whatever means to achieve this goal is not equivalent to taking random risks. Even otions can be used to reduce risks as Hussman Strategic Return fund demonstrated beautifully for the past 5 years.
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