Absolute return is expected to continue to gain traction among retail financial advisors in the next few years, according to survey results released Tuesday at Putnam Investments’ Absolute Return Symposium.
Seventy-six percent of financial advisors are familiar with the investment strategy, while 59 percent of advisors surveyed said they were at least somewhat likely to recommend absolute return funds to their clients. Most of these advisors would probably be recommending for the first time because of the strategy’s limited penetration, said Merl Baker, principal with Brightwork Partners, which conducted the survey for Putnam.
In the last month alone, the assets of absolute return funds have grown by 10 percent, with assets under management now at $140 billion across 1,000 funds, according to Gabriel Burstein, global head of investment research and portfolio solutions at Lipper and Digital Ventures. But Burstein says this number is still low. Robert Reynolds, president and CEO of Putnam, expects absolute return to make up 5 to 10 percent of the mutual fund universe in the next five to 10 years. According to data by Lipper and the Investment Company Institute, absolute return strategies currently account for about 1 percent of mutual funds. Putnam’s absolute return funds currently include $3 billion in assets.
The survey of 256 advisors, conducted by Brightwork Partners, also found that many advisors are looking to add alternative strategies to the mix of a traditional portfolio. While 56 percent said they expect to increase their clients’ equity exposure in the next 12 months, one-third of advisors also said they plan to boost exposure to alternative strategies.
“Looking in the long-only space is not where we should be,” said Cynthia Steer, managing director and head of beta research with Rogerscasey, who spoke at the Symposium.
Ultra-high net worth investors are also considering new investment approaches outside of traditional asset allocation strategies, said Kristi Kuechler, president of the Institute for Private Investors, during comments at the Investment Management Consultants Association Advanced Wealth Management Conference in San Francisco.
While absolute return has been a feature of institutional investing for decades, it is becoming more popular in the retail space, Reynolds said. Putnam has 9,000 separate advisors selling the funds across 400 firms.
The survey suggest that absolute return might be an attractive way for advisors to move clients out of cash or bonds in a rising market, according to Merl Baker, principal with Brightwork Partners. When asked what types of investments absolute return would replace, 46 percent of advisors said bond funds, while 41 percent of advisors would replace cash or FDIC-insured deposits.
While traditional investment strategies aim to outperform a strict benchmark such as the Standard & Poor’s 500, absolute return strategies are benchmarked to cash or some other cash-plus objective. Within the strategy, the portfolio manager takes responsibility for the entirety of the return, regardless of how the markets are moving. The manager promises positive total returns over a full market cycle with lower expected volatility. While absolute return funds can employ hedge fund-like strategies, other strategies may span a broad set of alternatives to traditional stocks and bonds, such as short selling, futures, options, derivatives and arbitrage, to name a few. Some absolute return funds are still long-only, but most are multi-strategy funds, Burstein said.
Putnam offers four target return Absolute Return Funds that seek to outperform inflation by 1 percent, 3 percent, 5 percent and 7 percent, respectively. The funds invest across global sectors and securities, said Jeff Knight, head of global asset allocation at Putnam. Since inception through September 30, the Putnam Absolute Return 700 Fund has returned 8.6 percent, while the standard deviation was 4.1 percent.
Eaton Vance Management also offers a suite of absolute return funds, including its Global Macro Absolute Return Fund, which closed to new investors last month with net assets of $6.4 billion. The fund invests in securities, derivatives and other instruments to establish long and short investment positions.
Advisors surveyed still largely view absolute return as a satellite holding, with only 16 percent viewing it as a core holding. Steer and Burstein believe absolute return should be a core holding.