INVESTOR EDUCATION
What is an Absolute Return Focussed Investment Style
At , we believe performance means making money for our members and the foundation of our
investment philosophy is to generate absolute positive returns for our members. This contrasts to the
broader fund management industry which is generally focused on beating benchmarks and will charge its
investors fees even when they lose money. Hence we explain exactly what we mean by an absolute return
strategy, and compare it to a strategy which is focussed on relative returns.
What do we mean by being focussed on “Absolute Return”
When we talk about absolute return, we mean the outright return for a period whatever it may be (positive or negative).
Absolute return strategies aim to produce a positive return, even when share markets
are volatile, flat or falling. The strategies absolute return portfolio’s use are less
constrained than that of a portfolio which can only buy and hold stocks.
It is the norm in the industry for a fund to measure its performance relative to an equity
benchmark index. For example, an Australian equity fund will compare its returns for
a given period (for example a month) to the ASX 200 Index (the performance of the top 200 stock in the Australian market by size). As an example, the table below illustrates how in certain cases (when the market is falling) a fund can lose money, but still have
positive relative performance.
Fund Return -5.00%
Australian Market (ASX200) -8.00%
Relative Performance 3.0%
In these cases the fund will still usually charge its investors performance fees for
outperforming the market. We do not believe in this approach, and our philosophy is
that funds should be focussed on generating positive returns, and not fixated on
beating the market. However it remains that case that the majority of funds which hold
shares are benchmark aware, with their respective benchmark being the market equity
index. Most funds will also not deviate far from the index in terms of the stocks they
hold, given the risk of underperforming the market.
So the question remains, what is an alternative to benchmarking performance to an equity market?
The answer is to compare returns to what an investor could earn if they invested the
funds into cash. By focussing on beating returns on cash, the portfolio will be positioned with the aim to generate positive returns, and returns may differ significantly from the broader market.
An Example – The Australian Model Portfolio
At , we believe performance means making money for our members and the foundation of our investment philosophy is to generate absolute positive returns for
our members. This means that at times the holdings in our fund may significantly differ
from the broader equity market. Below we have shown the sector weightings of the
ASX 200 index, which represents the biggest 200 listed companies in Australia.
Source: ASX
There is a very large weighting to Financials in the market index (47%), made up predominantly by the 4 major banks – ANZ, CBA, NAB, and Westpac. Our view is the outlook for the big banks is mediocre at best, and as such we hold none of the bg banks in the portfolio. Of the Financials we do own we are still underweight with only 20% of the portfolio in financials, as we presently hold one regional bank, an investment bank, and an insurance company. Another sector that we are underweight is Materials, and
overall we are not focussed on the index when constructing the porftfolio. We also
have the ability to hold cash in the portfolio when we believe it is appropriate in order
to avoid downside risks.
This comes with the risk that our returns will not follow the returns of the broader
market, however our investment philosophy prefers an absolute return approach.