Bruce Loveday

Absolute return investing is a tried and tested investment approach that can help investors accumulate wealth whilst also avoiding some of the major downside risks in the market, although it is unfortunately not well understood by many investors, according to ARCO Investment Management.

Speaking at a lunch event in Sydney today, ARCO Chairman Bruce Loveday said far from being a new philosophy, absolute return investing has been used successfully by sophisticated and institutional investors for many years and is now growing in popularity among advisers and self-directed investors.

“ARCO’s track record over the past 10 years as an absolute return specialist illustrates the degree to which this type of strategy can help investors manage market risks in their portfolio and be a great complement to more traditional equity funds,” Mr Loveday said.

“The ARCO Absolute Return Trust has generated over 8% pa net of fees for investors since September 2008, during which time the largest drawdown experienced was 4.7%, compared to over 30% for the broader Australian equity market. Adding this type of downside protection can help investors and their advisers build better portfolio outcomes in terms of diversification and consistency of returns.”

ARCO co-founder and portfolio manager George Colman added that the ability of the absolute return manager to not be constrained by market benchmarks and to more actively manage risk settings for investors as markets change means it is better positioned to manage downside risks for clients.

“For example, some valuations in the financial sector in particular are stretched at the moment in our view, and with house prices under pressure plus the Royal Commission’s scrutiny on lending practices likely to put more pressure on credit growth, we are positioning our absolute return portfolio to take advantage of pricing retracement in some financial stocks,” he said.

“We’re also bearish on sectors that are overly dependent on local consumer spending and credit and bullish on stocks that have a clear and compelling ‘self-help’ story that will reward shareholders.”

In terms of its approach to stock selection, Mr Colman said ARCO focused on the relationship between a stock’s price and its ‘fair value range’. Companies that are priced at either a significant discount or premium to their fair value range are interesting to ARCO and provide an important prompt for the investment team to take a deeper look at the stock’s risk and return potential before deciding whether or not to invest.

“Given the risks that we see building in the local economy, we also have a current preference for companies with some exposure to overseas markets that are at a different stage of the economic cycle,” he said.

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