The case for absolute return investing

By Lucy Dean

August 02 2018
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Misconceptions around absolute return investing could be holding investors back from wealth creation, an investment manager has said.

Speaking to Nest Egg, ARCO Investment Management portfolio manager George Colman questioned the logic behind investing to beat a benchmark when investors can still lose capital.

“Investors want positive returns (above cash), not to beat a benchmark when they’re still losing money,” he said.

“The greatest enemy of wealth creation is having to make-up for any capital losses first.”

With this in mind, Mr Colman said capital preservation at all stages of the market cycle is critical for investors and that absolute return investing can achieve this.

Continuing, he argued that despite misconceptions, absolute return investing is an alternative strategy that should be considered mainstream due to its history and accessibility in addition to its performance.

“It is proven to improve the risk/return (diversification) options for a portfolio,” Mr Colman said. “It has been around for many years [and] it is a more readily available strategy for investors today (and no longer just for the institutions).”

Speaking at a media briefing, ARCO chairman Bruce Loveday added that the strategy has been growing in popularity among self-directed investors.

“The ARCO Absolute Return Trust has generated over 8 per cent p.a. net of fees for investors since September 2008, during which time the largest drawdown experienced was 4.7 per cent, compared to over 30 per cent for the broader Australian equity market,” he said.

“Adding this type of downside protection can help investors and their advisers build better portfolio outcomes in terms of diversification and consistency of returns.”

Mr Colman added that this consistency is important as the likelihood of volatile markets increases.

“Like interest rates, overall market volatility has been unusually low for a long time – when it comes back, the investor is in for a rougher ride,” he said.

“Geopolitical risk is always a risk for investors (and sometimes an opportunity). The markets have been able to brush most recent events aside – helped by cheap money and rising markets.

“This will likely change as rates rise; money gets more expensive, housing softens and no longer has the ‘wealth effect’ that it has to date – in Sydney and Melbourne especially – and households get more nervous and investors more sensitive to them.”

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