In recent years,  the international investment arena has witnessed a huge increase in the popularity of Absolute Return funds that aim for a positive return regardless of how markets perform, usually over a rolling time period of no more than three years. In the UK, there are 93 funds within the Investment Association Targeted Absolute Return sector – 23 have been launched in the past three years as investors reach for positive gains in a world of volatile markets.

Absolute Return funds claim to be the best choice for stable returns.  The extreme volatility in both the UK and global markets provides an opportunity to test the assertation . The FTSE 100 index saw record highs in April 2015 of 7,103.98 and had hit lows of 5,536.97 by February 2016 being affected by miserable global news. During this time the average performance for the IA Targeted Absolute Return sector was -0.44 per cent, suggesting Absolute Returns funds struggled also for most of the last year.

Further, although managers are aiming for positive returns over three-year rolling periods, 10 out of 72 (almost 15 per cent) of Absolute Return funds posted negative results over the past three years, the worst getting knocked back 14.6 per cent. Equally, there are some outliers within the sector producing far higher gains than many other funds. For example, the City Financial Absolute Equity fund delivered 78.51 per cent. The difficulty that advisers and investors experience when evaluating this sector was discussed by the Investment Association’s review of the Targeted Absolute Return sector back in 2013. As with all actively managed funds the managers  experience, research and intuition come together to make the best decisions possible for investors.

Structured products may offer an alternative to the problems of the Absolute Return funds. Structured Products are available in a wide range possibilities, offering defined upside and downside protection.

Structured products with more defensive strategies have seen an uplift in popularity in recent months due to continued volatility in the markets, plus muted returns being generated by portfolios of funds. With returns of around 6 to 9 per cent annually, defensive structured products can achieve this when the FTSE 100 and other major indexes are down by 10 per cent or even 20 per cent.

The table shows that looking at 10 UK kickout (or Autocall) products maturing in 2015 (which were the best performers last year linked to major equity indexes), an average annualised return of 8.9 per cent was achieved.

Over the same period, the IA Targeted Return sector achieved an average annualised return of 4.1 per cent. Achieving target return in a truly absolute fashion may actually be easier with structured products.