Despite the disappointing performance of absolute return funds over the past 18 months, these products still offer opportunities for investors looking for diversification and uncorrelated returns in volatile markets, according to the latest issue of The Cerulli Edge―European Monthly Product Trends Edition.

However, to win back investors in Europe and curtail outflows, absolute return managers will need to turn around performance and cap strategies before they become too large to maneuver, says Cerulli Associates, a global research and consultancy firm.

Since around mid-2018, absolute return funds have underperformed, prompting many investors in Europe to exit. Today’s situation is far removed from the years following the global financial crisis, when absolute return strategies were a favorite among investors seeking diversified solutions that could withstand market turbulence.

“Over the past two years, these funds’ ability to diversify proved to be their downfall. All assets were moving in the same direction and the funds could not deliver the returns they were supposed to in all market conditions,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli.

Even though the absolute return sector as a whole has delivered disappointing performance over the past 24 months or so, market volatility is expected to increase in 2020, and these funds could play a role in gathering uncorrelated returns and bringing diversification to the traditional equity and bond portfolios during market downturns, says Cerulli.

However, the firm also acknowledges that latest net retail sales figures from the Investment Association (IA), a trade body, suggest that absolute return fund managers’ troubles are far from over—certainly within the U.K. The worst-selling IA sector in November 2019 was targeted absolute return, with £656 million (US$856 million) of outflows. Some absolute return funds have, however, bucked the trend for underperformance.

Other Findings:

• European equity markets remained relatively flat during November; however, European equity funds suffered €666 million (US$640 billion) of net outflows during the month. The North American and European equity sectors recorded net outflows in 2019. Global equities and global currency bond funds sold well in November as investors sought to reduce risk via diversification.

• The U.K. mutual fund industry finally posted positive net sales during the month of November (£1.3 billion), having suffered net outflows almost every month of 2019 to date. The gains were largely the result of inflows of £2.0 billion into equity funds; the second-largest net inflows of the month were to bond funds: £947 million. Property funds saw net outflows of £330 million, but the worst-selling sector was mixed-asset funds, which registered net outflows of £1.6 billion during November, taking the sector's YTD net outflows to £14.0 billion.