How Absolute Return Funds Deliver Stability in Uncertain Markets

Periods of instability expose a simple truth. Investors do not benefit from volatility. They benefit from the consistent and disciplined compounding of capital over time. This is where absolute return funds provide a practical advantage. The objective is not to outperform an index in a single year. The objective is to deliver steadier outcomes through changing conditions.

Uncertain markets have defined the past decade. Inflation cycles, geopolitical shocks, liquidity shifts and persistent valuation dispersion have made it harder for investors to rely on traditional risk models. More investors now seek strategies designed to preserve capital first, then grow it responsibly. An absolute return strategy meets this requirement by aiming to deliver positive returns regardless of the broader equity market direction.

The Core Insight: Protection During Stress Drives Long-Term Outcomes

A large portion of long-term wealth creation comes from avoiding deep losses. Recovering from a drawdown consumes time, capital and opportunity. Absolute return funds protect capital by managing exposure, maintaining liquidity and avoiding the constraints of benchmark-driven investing.

Insight: Since 2018, the Datt Absolute Return Fund has delivered a steady cumulative return profile through multiple market cycles. Periods that saw material declines in broad equity indices, including 2020 and 2022, did not lead to large drawdowns for the fund. The curve remains stable and controlled, which reflects disciplined exposure management and a focus on capital preservation.

Disclaimer: Educational example only. Past performance does not predict future outcomes.

How Absolute Return Funds Generate More Stable Outcomes

Absolute return funds rely on multiple return drivers, not a single market trend. This structure supports lower volatility and steadier performance.

1. Flexible Use of Asset Classes

The absence of benchmark constraints allows absolute return managers to sidestep unattractive parts of the market and redirect capital to areas with favourable risk reward. Exposure can shift between equities, cash, credit, hybrids or special opportunities depending on conditions. Flexibility acts as a natural risk management tool.

2. Independent Idea Generation

Absolute return outcomes rely on differentiated research. At Datt Capital, our mosaic process draws from academic literature, regulation, scientific research, industry networks and primary data, not consensus broker reports. This reduces bias and encourages original thought in security selection.

3. Liquidity and Risk Controls

Maintaining liquidity through market cycles supports timely decision-making. It also protects investors when liquidity conditions tighten. The capacity to scale positions up or down without undue price impact is essential in uncertain markets where volatility can spike with little warning.

4. Low Correlation to Equity Markets

Absolute return strategies are most effective when their return behaviour is independent from broad equity movements. Correlation is a critical measure of this independence. When returns do not track major indices, investors gain a diversifying component that reduces concentration risk and stabilises outcomes through volatile cycles.

Insight: The scatter plot shows how the Datt Absolute Return Fund sits apart from the peer group. The cluster of other funds demonstrates similar factor exposures and correlated behaviour. In contrast, the Datt fund shows a distinct return pattern that reflects a research led process focused on company specific and opportunity specific drivers instead of broader market beta.

While correlation is measured separately, dispersion in the scatter provides a clear visual representation of non clustered behaviour, which is consistent with low correlation characteristics seen in absolute return strategies.

Disclaimer: This chart is for educational purposes only and should not be interpreted as a forecast or guarantee of future results.

What Recent Market Cycles Demonstrate

The last decade highlights the practical value of absolute return funds.

• During rising markets: They participate selectively while avoiding excess risk and crowded trades.
• During range bound market: They rely on multiple return sources rather than relying solely on equity beta.
• During market shocks: Their controlled exposures and liquidity discipline limit drawdowns and protect capital.

The Broader Environment Favouring Absolute Return Strategies

Several structural forces increase the relevance of absolute return funds for Australian investors.

1. Inflation cycles remain unpredictable

Inflation volatility increases dispersion across industries. Rigid index exposure may struggle in this environment, while flexible strategies adjust more effectively.

2. Policy cycles tighten and ease with greater frequency

Interest rate reversals create uncertainty around equity valuations. Absolute return funds reduce reliance on this single variable.

3. Market breadth is uneven

A narrow group of large cap stocks has driven index performance. Concentration risk rises when fewer companies contribute to returns. Absolute return funds avoid this concentration.

4. Investors seek lower volatility outcomes

Affluent retirees, SMSFs and institutions increasingly prioritise capital preservation and consistency. Absolute return funds align with these objectives.

How Datt Capital Approaches Absolute Return Investing

The Datt Absolute Return Fund applies a research-driven, independent and disciplined framework that prioritises capital preservation and long-term compounding.

Independent Research and Mosaic Analysis

We combine primary research, specialist networks, academic insights and historical industry structures to build conviction. We avoid broker dependency to maintain independence.

Discipline Around Liquidity and Risk

We assess balance sheet strength, structural trends and market microstructure. The objective is protection first, growth second.

Alignment With Investors

Every principal invests in our funds, making the strategy accountable and directly aligned with investor outcomes.

Focus on Asymmetric Opportunities

We seek situations where downside is controlled and upside is meaningful. These opportunities appear in dislocations, special situations and overlooked segments of the market.

The aim is to deliver stable, risk-aware returns across market cycles through a systematic and independent approach.

Conclusion

Absolute return funds provide a practical solution for investors who want stability during uncertain periods without giving up the ability to grow capital. Lower drawdowns, flexible positioning, independent research and broad diversification help deliver more consistent outcomes over time.

For investors seeking disciplined risk management and a structured absolute return strategy, the Datt Absolute Return Fund offers a research-led framework with direct manager alignment.

To learn more, visit the Absolute Return Fund page or explore our investment philosophy. For further enquiries, contact Daniel Liptak, Head of Distribution, at daniel@datt.com.au.