Unpacking absolute return: Is this the most misunderstood strategy in today’s market?

Absolute return strategies are designed to deliver consistent outcomes by reshaping the distribution of returns. Their value lies less in outperforming during extended rallies and more in preserving capital when conditions deteriorate.

By doing so, they sustain the compounding effect that drives long-term wealth creation.

To appreciate the absolute return mindset, consider Serena Williams’ historic win-loss record. Not every match was a blowout, but few were thrown away. Serena Williams won 23 Grand Slam singles titles and nearly 86% of her matches. Yet she won only about 55% of the points she played. Her dominance came from winning the points that mattered most, limiting unforced errors, and staying in the match when opponents faltered. Champions are not those who win the most points in the early rallies, but those who make the fewest errors when it matters most.

This principle is best understood through the lens of asymmetry. Figure 1 shows the familiar payoff curve, which is not marketing artifice but the principle of aiming to maximise participation in upside market movements while limiting downside risk. Absolute return is the investment philosophy and asymmetric returns are its implementation. The core objective is to protect capital and grow it in real terms.

Figure 1: Asymmetry of returns – upside versus downside participation

Source: Sanlam Investments

Why the best offence is a good defence

Absolute return strategies are not designed to dominate every market rally but to remain resilient when conditions turn, steadily compounding capital while avoiding the deep drawdowns that can derail long-term growth.

There is a reason why Warren Buffett’s often-quoted first rule of investing – “never lose money” – is also the second rule: “never forget rule number one”. These should not be treated simply as aphorisms, but a recognition of the mathematics of drawdowns.

Buffett’s maxim is illustrated in Figure 2: the deeper the decline, the more disproportionate the recovery required. A loss of 20% necessitates a 25% gain to return to par; a 50% drawdown demands a full 100% recovery. Avoiding those large reversals is not a matter of conservatism – it is alpha expressed through the arithmetic of compounding.

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