When absolute return is absolutely right
It’s no secret that many relationship managers lead a high-stress life, and that burnout is not so uncommon. Performance determines income, so the pressure is always on – and the boss expects sustained success. Unsurprisingly, many relationship managers say they never stop thinking about the job. Under those conditions, balancing professional and family life is nearly impossible.
We’re absolutely sure that it doesn’t have to be that way. How? Because for the past 20 years, we’ve managed what we like to call a “sleep well” portfolio with stable returns, below-market volatility, and drawdowns at only a fraction compared to traditional asset allocation models.
So what is the investment strategy that helps us sleep soundly at night? It’s called absolute return. You likely know about it, but have you ever really considered the key aspects, advantages, or suitability? It’s time you did.
For the past 20 years, we’ve managed what we like to call a “sleep well” portfolio.
It’s about the objective
If you’re a portfolio manager, chances are you’re focused on relative returns rather than absolute returns. That means, of course, that you aim to outperform a benchmark index or specific market segment. You actively manage a portfolio of assets similar to your benchmark, but you want to “beat” that benchmark by overweighting or underweighting certain assets and using other active management strategies.
An absolute return strategy aims to generate positive returns regardless of market conditions. This involves investing in a diversified portfolio of assets, including equities, fixed-income securities, commodities, currencies, and derivatives. Your goal is to generate positive returns over a specified period, irrespective of whether the overall market is up or down.
Another difference between relative and absolute return is the approach to risk management. In an absolute return strategy, you seek to limit downside risk with a focus on capital preservation and consistent performance across different market environments. In contrast, a relative return approach manages risk by attempting to outperform a benchmark or market segment while operating within specific risk parameters.
In summary, both strategies involve active management and risk management, but their ultimate goals and approaches to achieving those goals differ significantly.
It’s about the investor
An absolute return strategy doesn’t work for all. It depends on the investor’s goals, risk tolerance, and time horizon. In general, investors should want the following:
An absolute return strategy may suit investors looking to diversify their investment portfolio beyond traditional asset classes, such as stocks and bonds. By incorporating non-traditional assets or tactics, investors can reduce their exposure to market fluctuations and potentially enhance the risk-adjusted returns of their overall portfolio.
2. Preservation of capital.
The goal of generating positive returns regardless of market conditions will attract investors looking to protect their capital and minimize the risk of loss. Protecting wealth is particularly important for investors with specific financial goals or shorter time horizons.
3. Consistent returns.
Absolute return strategies aim to generate consistent returns over time, which may be attractive to investors seeking stability or a steady income stream. This consistency delivers a level of predictability and peace of mind that aligns with their plans and needs.
4. Active management.
Investors who value hands-on, holistic management of all their assets will be interested to learn more about absolute return. The strategy requires proactive managers with agile processes and flexible tools to respond quickly to changing market conditions. An absolute return strategy without active management will not add value.
Absolute return strategies are often most suitable for high-net-worth investors with complex financial situations. This is because they may benefit the most from the aspects above, especially diversification and risk management. Furthermore, most absolute return models are managed by hedge fund or other portfolio managers who may have high minimum investment requirements.
It’s about weighing the advantages and disadvantages
When determining whether absolute return is right for you and your clients, looking at the advantages and disadvantages is also helpful.
Absolute return models are less connected to traditional markets than relative return strategies. As a result, managers have more freedom to develop portfolio positions and follow hedging strategies. Investors benefit from the higher diversification and lower risk that results. By incorporating assets with different performance drivers than traditional stocks and bonds, an absolute return strategy can help smooth out the ups and downs of the market.
An absolute return strategy is intrinsically agile. Managers following this model must adjust portfolios frequently in response to ever-changing market conditions. This active approach opens opportunities to exploit market inefficiencies and capitalize on emerging trends. Moreover, it provides the flexibility needed to minimize risk and maximize returns.
Particularly in volatile market conditions, absolute return models have the potential to generate attractive returns. The freedom and agility described above allow portfolio managers to identify and exploit opportunities that may arise during periods of market dislocation or uncertainty. This potential for above-average returns can attract investors seeking to generate income or grow their wealth.
1. Hidden fees
The fees associated with managing an absolute return strategy are often higher and less transparent than relative return models. These fees can include management fees, performance fees, and other expenses, which can reduce the investor’s overall returns. Therefore, it’s important to understand the entire range of fees involved and to be open about the fee structure so that clients can evaluate whether the potential benefits outweigh the costs.
2. More complexity
Absolute return models are often complex, making it difficult for investors to understand the underlying investment strategy and risk profile. Unlike traditional stocks and bonds, which are easily accessible and well-regulated, absolute return may involve derivatives or other alternatives. Managers must be able to sift through the complexity and simplify it for their clients.
3. Limited liquidity
Absolute return often involves investments in illiquid assets, such as private equity and real estate. These investments may have lock-up periods or restrictions on redeeming capital, making it difficult for investors to access their money quickly. Portfolio managers can help ensure investors understand their liquidity needs and have sufficient access to liquid assets outside the absolute return strategy.
It’s about peace of mind
At Marcuard Heritage, we believe absolute return is the best option for our clients. And we have a 20-year track record and two decades of peace of mind to prove it.
If you want to move your clients away from a traditional investment model, we encourage you to get in touch. We’re absolutely sure you’ll sleep better too.