New Absolute return study by Lupus alpha

Frankfurt - 14 March 2014

  • Selection process in the market for absolute return funds has begun 
  • Market volume is on the increase / 5-year comparison shows significant quality increase 

The absolute return sector is experiencing a product adjustment. Whereas the number of funds has continuously increased or remained constant in recent years, in 2013, for the first time, significantly more funds closed than new ones were opened. Net, 114 products have disappeared from the market. Despite the decreasing number of products, the market volume has continued to increase, which shows the growing interest of investors in the sector. The 5-year comparison clearly demonstrates a quality improvement. This is the result of the absolute return study based on data by Lipper fund analysts. 

The results of the current absolute return study from 31/12/2013 show a clear reduction from 619 to 505 fund concepts. 144 fund closures and mergers were offset by a mere 30 new funds. In the previous year, the closures (78) and foundations (77) in this sector were pretty much balanced. The analysis shows that mainly funds with weak volumes and performance were affected. Assessing the result, Ralf Lochmüller, Managing Partner and spokesman of Lupus alpha, says: "The wheat is being separated from the chaff. This concentration is a good thing for the absolute return sector". "The selection process means that concepts, which are not sustainable, are disappearing from the market, whereas high-quality products will endure," he explains. 

On average, the volume of the closed funds was EUR 3.84 million. In 2012, the annual performance of these funds was on average -3.14% p.a. (and -3.58% p.a. in 2011) and their average age was approximately four years. "Contrary to expectations, it was not the young fund concepts that were affected, but small absolute return funds with poor value development," continues Lochmüller. "Despite the decreasing number of products, the demand for risk-controlled investment opportunities is on the increase due to the continued low-interest rate environment, which leads to the increasing volume in the absolute return sector." After an increase of 20% in the previous year, the market volume of absolute return funds has again increased by approximately 21% to EUR 125.4 billion in 2013. 

Parallel to the selection process, the quality has significantly improved in the 5-year performance comparison. Almost 90% of 170 examined funds with a 5-year track record achieved a positive absolute return. Compared to the previous year, this is an increase of approximately 25% - by 31/12/2012, only 64.9% showed a positive return in the 5-year comparison. The average 5-year return has also increased from 0.78% p.a. at the end of 2012 to 3.65% p.a by 31/12/2013. Therefore, an increasing number of absolute return funds are keeping their promise to deliver a positive absolute return for their investors in the long term. However, the Lehman collapse is no longer included in the current analysis period. 

It is encouraging news that the number of funds, which were able to achieve a return via the capital markets, is also on the increase. Over five years, 78% of the funds achieved a positive Sharpe ratio*. In the previous year, only 34% of funds were able to manage that. However, the quality differences between the individual funds remain. This is shown by the broad variation of the Sharpe ratios between -1.44 and +2.65. "The absolute return sector is not a homogeneous asset class. In order to select the high-quality funds, intensive analyses and assessment of strategies are required," explains Lochmüller. 

* The Sharpe ratio indicates the excess return of an investment compared to the safe money investment, adjusted by the risk that was taken (i.e. the volatility of returns). It is calculated on an annualized basis as (R-r0)/σ, with R being the mean return p.a., σ the standard deviation p.a. and r0 the risk-free interest rate. 

Lupus alpha has been analysing the absolute return funds sector based on data by Lipper fund analysts since 2008. The study is published every six months and covers the absolute return funds that are licensed for sale in Germany based on the Lipper database. The criteria for the fund selection are, apart from the sales licence in Germany, the UCITS III-conformity of the relevant fund classes. Funds with a track record of 1, 3 and 5 years are analysed.


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