Wednesday, 6 November 2013

Correlation Street Repeats

It was exactly a year ago when we first highlighted our concerns that the ‘average’ IMA Target Absolute Return Fund was of little benefit to the ‘average’ equity biased portfolio in our Correlation Street blog. A year on and, as you will see from the below chart, nothing has changed*.
Source Brewin Dolphin

Given the persistent and high levels of correlation with the FTSE All-Share, it appears the typical ‘Target Absolute Return’ fund manager is merely assuming a modest amount of equity risk whilst leaving the vast majority of assets in cash. The net result for the client is simply a lower risk and lower return iteration of equity market performance. The sector, on average, therefore, is a poor diversifier of risk assets, and should be treated with trepidation in regard to the role in which it actually fulfils within portfolios. This is particularly the case given funds of this nature tend to levy a rather odious performance fee.

*For those less familiar with charting tools, please not the FTSE All-Share performance is plotted against the Left Hand Side axis, whilst the IMA sector is plotted against the Right Hand Side axis. This change in scale allows us to monitor the similarity in behaviour between two assets with a significantly different level of price volatility.

Ben Gutteridge
Head of Fund Research

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