Absolute returns might not be a safe haven after all
The massive diversity within this growing sector can trap unwary investors. Chiara Cavaglieri investigates
Sunday 07 August 2011
With the current economic instability, any private investor is bound to feel a touch of the collywobbles. Against this turbulent backdrop, one type of fund – absolute returns – is supposed to stand tall.
As the name suggests, these funds aim to generate growth in all market conditions by going beyond the normal fund manager tactic of selecting stocks for income and growth. Investments are hedged and managers have more freedom to spread investor cash across a range of assets. Although they aren't reaching for the stars, these funds aim to make at least some positive returns, irrespective of falling stock markets.
But there is growing criticism. Performance is decidedly second rate, particularly among some big-name launches. More seriously, ratings agencies and even the Financial Services Authority (FSA) has flagged the sector as a concern, sparking fears that absolute returns could be the next mis-selling scandal.
"Because there is no commonly agreed definition in Europe of what constitutes an absolute return fund, we see an increased risk that they could be mis-sold to investors who might not be aware that the funds only aim to outperform cash returns, rather than a stock market index, and that returns are not guaranteed," says Manuel Arrive, a senior director in Fitch's Fund and Asset Manager Rating team.
It can be a struggle to distinguish between the options available. Strategies can be complex, with managers using traditional investments in shares alongside financial instruments such as derivatives, which are specialised products enabling investors to bet on an assets' future price movement.
In a bull market, the risk is that these funds will underperform traditional equity funds, but for many, the assurance of returns year in year out is worth sacrificing such gains. But it seems much of the absolute return sector is failing to perform the basics of keeping pace with inflation.
In the year up to 31 July 2011, only 43 per cent of funds in the Investment Management Association (IMA) absolute return sector managed to beat even the lower measure of inflation that is CPI and deliver positive returns, according to Financial Express (FE) Analytics. "There is a perception that absolute returns are fine if they beat the rates available through a savings account, but what really counts is if they beat inflation. Otherwise you're getting poorer," says Pascal Dowling, investment specialist at FE.
Eleven funds out of 69 actually lost their investors money, and the poorest performers included Polar Capital's UK absolute return down 6.39 per cent, GLG's Alpha Select down 7.02 per cent, and IFDS's IM Octopus Absolute European down 7.72 per cent.
Investors also face high charges, with most fund managers taking annual fees of up to 2 per cent and a cut of positive returns. "Many have performance-related charges, with the fund manager creaming off an additional 20 per cent of the outperformance against a target. This 'hurdle' to qualify for an additional payment is usually set very low," says Martin Bamford from independent financial adviser (IFA) Informed Choices.
But not all is poor; FE Analytics figures show that some managers recorded impressive returns in the year to 31 July, with CF Odey's UK absolute return up 33 per cent, Cazenove's Absolute UK Dynamic up 30 per cent and GLG's Emerging Markets Equity up 22 per cent leading the way. Yet in one respect this sort of fantastic performance shows a fundamental flaw in the absolute returns sector. If the idea is to have funds delivering relatively constant positive returns without much volatility, what are investors and regulators meant to make of such a diversity in performance?
Advisers argue that there are so many different types of fund that to compare like with like is almost impossible. Even taking three examples of funds with a common theme will bring up significant clashes in terms of risk appetite, says Darius McDermott of IFA Chelsea Financial Services. He cites the Absolute Insight UK, the Henderson UK Absolute Return fund and the Cazenove UK Absolute Dynamic. "They are all in the same sector and use same tools, but I would suggest that they are three quite different funds," he says. "The absolute returns sector is a real mixed bag in terms of how the fund managers achieve their targets, how much risk they take and what tools they use to get to their targets."
Such a broad universe makes it even more difficult for investors to make the right decision, and the IMA is under pressure to establish subdivisions that will define the various types of funds and the strategies employed.
Money roundup video: It's getting harder to sort out a mortgage
10 tips for taking out a personal loan
Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help
Is it really that bad in the bond market?
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 2 California man brutally beat 82-year-old Sikh grandfather he mistook for 'one of those people'
- 4 Charles Kennedy 'had better judgement drunk than many sober politicians' says Ian Hislop
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination
Migrants in Kos: Photos show real tragedy after Brits abroad complain of 'awkward' holidays
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
Michael Gove determined to scrap the Human Rights Act – even if Scotland retains it
Threat to scrap Human Rights Act could see UK follow Nazi example, warns UN official
Church of England 'one generation away from extinction' after dramatic loss of followers
iJobs Money & Business
£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...
£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...
£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...
£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...
Day In a Page
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool