LF Brook Absolute Return Fund: an absolute return fund generating absolute returns

Ian Orton, 20/06/2022

Absolute return funds that aim to generate positive returns irrespective of market conditions have often turned out to be problematic for investors. Far from generative absolute returns many have struggled to generate any returns, especially during the volatile markets experienced during the 2020s.

A recent analysis of UK authorised absolute return funds conducted by Morningstar found the majority of funds failed to outperform against benchmarks between 1 March 2020 and 28 February 2021, when markets were hit by the impact of Covid-19.

The likelihood is the sector will find the current high inflationary environment just as challenging.

One fund that appears to have bucked the trend is the £559 million LF Brook Absolute Return Fund, a global equity long/short UK UCITS.

Launched in 2009 as the LF Odey Absolute Return Fund and managed by James Hanbury and Jamie Grimston, the LF Brook Absolute Return Fund still remains in positive territory during 2022 despite plunging global equity markets.

At 17 June it was still up by 0.38 percent for the year to date. Its benchmark, the MSCI Daily Total Return Net World (GBP), was down 13.75 percent.

The fund also outperforms its benchmark over longer time periods.

It has posted returns of 3.89 percent, 0.52 percent, 59.25 percent and 61.52 percent over three months, one year, three years and five years respectively.

This compares with the -9.43 percent, -3.57 percent, 26.04 percent and 47.92 percent posted by the benchmark.

Since its inception in 2009 the LF Brook Absolute Return Fund has posted a return of 363.37 percent, a compound annual growth rate of 12.41 percent.

Over the same period the benchmark has generated a return of 321.22 percent, a compound annual growth rate of 11.59 percent.

The fund has also outperformed its peers by a substantial margin, especially during the Covid-19 pandemic.

According to Morningstar, the fund’s outperformance reflects a small/midcap focus. Between 1 March 2020 and 28 February 2021, for example, its holdings had an average market capitalisation of around £2 billion.

This compares with the absolute return sector’s average market capitalisation of around £31 billion.

It also had a higher weighting towards basic materials, financial services, consumer cyclicals and industrials.

The small/mid cap bias is reflected in the fund’s volatility, as measured by the standard deviation (SD) of returns.

At 23.91 percent, 32.97 percent, and 26.75 percent over one, three and five years respectively, this is much greater than the benchmark’s 11.93 percent, 16.83 percent and 14.55 percent.

The fund’s downside deviation is also greater than the benchmark, suggesting that higher returns come with greater volatility.

It has, however, a positive Sharpe Ratio over one year, three years and five years.

With a Sharpe Ratio of 0.67 since inception it seems that investors are being reasonably well rewarded for the higher risks involved in holding the fund.

Whether this will remain the case going forward remains unknown.

The fund has not been immune from the exceptional volatility experienced during June 2022 by global stockmarkets following the realisation of just how persistent the recent inflationary pressures inflicted by the aftermath of the Covid-19 pandemic, along with the impact of Russia’s invasion of Ukraine, are likely to be.

So far during June the fund is down by around 7.4 percent.

Nonetheless, it does have two experienced managers.

Mr Hanbury joined Odey Asset Management in 2008 following stints at ZA Capital, a London-based hedge fund manager, and Schroders where he commenced his career as an investment manager.

Mr Grimston joined Odey in 2010 from Orbis Investment Advisory. He commenced his career at Fleming Family and Partners in 2004.