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.
Phoenix Life: Chance of a refund for overcharged policyholders has risen
10 tips for taking out a personal loan
Has your Premium Bond won the £1million jackpot?
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 1 Bill Clinton portrait features Monica Lewinsky reference, artist admits
- 2 What happens to your body when you give up sugar?
- 3 Delhi bus rapist blames dead victim for attack because 'girls are responsible for rape'
- 4 Have sex with your iPad thanks to the new sex toy no-one asked for
- 5 Average penis size revealed: Scientists attempt to find what is 'normal' to reassure concerned men
New theory could prove how life began and disprove God
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
This is what it's like to be dead, according to a guy who died for a bit
Durham Free School: 'Creationism taught at' free school facing closure
Ukip would cut billions from Scottish budget to fund English tax cuts
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
iJobs Money & Business
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...
£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...
£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Day In a Page
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
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads