Absolute Return Funds: Absolutely No Return?

The promise of ‘Absolute Return’ first came to prominence in 2008 and has beenso popular the Investment Management Association (IMA) has introduced aspecific sector for the funds. The IMA defines Absolute Return funds as:

“Funds managed with the aim of delivering absolute (i.e. more than zero) returns in any market conditions. Typically, funds in this sector would normally expect to deliver absolute (more than zero) returns on a 12 monthsbasis”.
Millions of pounds have subsequently flooded into this sector on the back of this relatively straightforward promise. So how have they done?

In the most recent review by Morningstar (the industry bible for pastperformance) only 25 of the 65 funds in the IMA Absolute Return sector produced positive returns. That means over 60% failed to produce a positive return. The top performer produced a return of just over 11% and the worst performer lost 16% of its capital value before costs. In 2011, the FTSE 100 lost around 5.5% in value, but on average yielded around 3% so ignoring tax and fund charges a UK centric fund just had to cover their costs and create 2.5%value over and above the FTSE 100 index in order to maintain the value of their investors’ money.

Clearly, if you are one of the investors who was lucky enough to pick an Absolute Return fund which did produce a positive return, then you have either picked very well or been very lucky. However, for the vast majority of investors the funds area misnomer.

What can investors learn from this?

Until a fund manager guarantees no capital loss, there is not, and there will never be, such a thing as an absolute return fund. Rather than purchase the latest sales gimmick from the investment industry, take a long and dispassionate look at what your investment objectives are, get professional help to interpret how risk adverse you are (there is no getting away from the fundamental statement that if you want above average returns you have to take above average risk) and then buy the most appropriate asset classes for your circumstances. We prefer to save money and simply “buy the market” but some prefer to pay active managers in the hope they will out perform (something very few do, but that is another story!

If you would like me to cast a critical eye over other industry topics next month do let me know.

Andrew Swallow andrew.swallow@swallow-financial.co.uk