Absolute Return Funds Are they for You
WITH STOCK markets bouncing around like yo-yos, it’s no wonder absolute return (AR) funds – which aim to deliver the goods even if markets are tanking – are flavour of the month with investors.
However with the UK’s financial regulator now sniffing around this sector, and warnings being sounded about the potential for miss-selling, investors need to do their homework before following the herd.
AR funds are a marketer’s dream. The raison d’être of these funds is to deliver positive returns in all market conditions so they can be pitched as “safe havens”.
It’s easy to see why the chance to make money, whether markets rise or fall, has gripped investors’ imaginations.
AR funds all aim to grow your cash into a larger pile of cash, regardless of what’s going on in the markets, but the managers of these funds employ a huge variety of strategies in their quest to achieve this act of financial wizardry.
Take one of the biggest players – Standard Life’s Global Absolute Return (Gars)
Fund. At the end of June, this fund was invested across more than 10 asset classes, and employed almost 30 different investment strategies.
For all but the most experienced person, to actually understand what the fund is doing or how exactly the decisions come about is probably expecting too much.
Then there’s the BNY Mellon Real Return Fund, which uses a multi-asset approach, investing in anything from shares and bonds to forestry and emerging markets.
Aviva’s offering is completely different again, with its Blackrock European Absolute Return fund investing largely in European shares.
These funds have very little in common, yet all of them are lumped together under the AR umbrella, which creates the potential for misplaced expectations.
Their performances also vary widely. Standard Life’s Gars fund grew just 1.6 per cent in the year to the end of June 2011, although in the previous year it delivered a return of 18.7 per cent.
There were reports too that the FSA has quietly advised firms launching new funds against using the “absolute return” label. It seems the worry is that the name creates the impression that growth is guaranteed.
“Investors may be disappointed by AR products if they lack understanding and acceptance of their risk/return characteristics,” Fitch said. The agency also said that since the collapse of Lehman Brothers, AR funds have been far more focused on managing risks, and this focus may result in “modest returns”.
Independent financial adviser David Thrifty of Ariun UK believes that as an alternative approach to investing money, AR “certainly has merit”. He explains that with traditional “long only” funds, the investor’s leap of faith is that the assets in which the manager invests will rise over time.
With AR funds, the leap of faith is that the investor is picking the right fund manager.
Thrifty also advises that the funds should be used in a diversified portfolio, but he has heard anecdotal instances of people investing as much as 60 to 70 per cent of their wealth in AR funds.
“If that’s the case, I think the sector is in danger of becoming a victim of its own success,” he says.
“Having gone through a decade with two savage bear markets, it’s totally understandable that people are searching for some new strategy that’s going to avoid the downsides. It’s the holy grail of less risk and more return – it sounds wonderful,” he says.
However investors need to cut through the marketing spin to make sure there’s “investment substance” backing it up. “And you won’t find that out by just looking at the label on these funds.”
Few small individual investors have the time, knowledge or inclination to acquire a thorough understanding of exactly how these funds operate. Therefore advice is key.
However this recommendation Thrifty says is based on the assumption that financial advisers have a solid grasp of exactly how the different AR funds operate, and that in itself requires another leap of faith.
Investors may be disappointed by AR products if they lack understanding and acceptance of their risk/return characteristics.
If you would like further information on AR funds, contact