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Defining absolute return a ‘huge challenge’

Defining absolute return a ‘huge challenge’

Tim Stewart
— 1 minute read

The financial services industry has work to do when it comes to terms like ‘absolute return’, says ARCO Investment Management chair Bruce Loveday.

Bruce Loveday is the chair of family office Burnham Group, and oversaw the group’s partnership with absolute return boutique ARCO Investment Management in early 2017.

Mr Loveday became the chairman of ARCO in June 2017 and sits on the board with Burnham chief executive Chris Cunningham and ARCO principals George Colman and Peter Whiting, who run a long/short Australian equities absolute return fund.

ARCO, previously Optimal Fund Management, has been running its absolute return fund since September 2009 and has $150 million in funds under management.

Since Burnham took its minority stake in ARCO the fund has been restructured from a hedge fund with a $500,000 minimum investment and monthly liquidity into a Zenith-rated retail product with daily liquidity.

“Normally you might expect a business that has been around for the best part of 10 years with $150 million FUM would have had terrible performance, but in fact it's had pretty good performance,” Mr Loveday said.

“George and Peter would acknowledge that their fascination with investment markets has probably been what they've spent almost all of their time doing,  along with looking after the existing clients – but they haven't been out developing new ones,” he said.

The fund has returned 8.2 per cent compounded net of fees since September 2009, he said – noting it had done so with volatility of only 3.8 per cent per annum (compared to 13 per cent for the broader market).

The low volatility is what differentiates ARCO from some of the other absolute return equity funds in the market, he said.

“When it comes to leverage, our gross market exposure rarely gets above the 150 per cent and is usually not much more than 100 per cent. It is a low variable beta strategy,” Mr Loveday said.

That compares with other long/short funds – which he describes as “good funds run by smart people” – who have the potential to gear up as much as 400 per cent.

“When you get it right, that much leverage can generate spectacular returns. But conversely, when you get it wrong it goes the other way,” Mr Loveday said.

“There’s nothing wrong with that, and in many cases there can easily be a role for both strategies in a given portfolio,” he said.

Mr Loveday acknowledged that the term ‘absolute return’ is used rather loosely by fund managers and it can sometimes be used as a marketing term.

“It's a huge challenge for [advisers and investors] to know whether or not they're hearing someone talk about an absolute return strategy when in fact it's just a technique to try and differentiate what [the manager] is doing from some other manager,” he said.

“It's fair to say that the industry generally has got a bit of work to do and I include the managers, maybe some of the research houses, asset consultants – all of us – have still got a little bit of work to do in explaining what we mean when we use certain sorts of terminology and actually being very clear and straightforward about it,” Mr Loveday said.

 

Defining absolute return a ‘huge challenge’
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