Absolute shambles of absolute returns
The spectre of mis-selling stalks the investment sector yet again with negative returns on funds labelled 'guaranteed'. By Emma Dunkley
Sunday 15 July 2012
Absolute return funds promised the investor the best of all possible worlds – steady returns no matter what is going on in the wider market. But the reality is proving way short of the marketing hype.
Instead of producing returns above zero, more than half of these funds have delivered negative results in the last year. While the average fund was down 3 per cent in this time, the range of returns has been shockingly varied, with the worst fund down 22.1 per cent and the top fund up 12.7 per cent.
Although other investments aim to achieve returns over a loose time-frame, or no particular period of time at all, absolute return funds are expected to deliver a positive performance, despite market conditions, on a 12-month basis.
But Alan Miller, founder of SCM Private, says this investment objective is clearly impossible and blatantly misleading the public. "Up to £30 billion of these funds have been completely mis-sold to the general public as a direct result of the incompetent labelling," says Mr Miller.
And just because these funds aim to deliver you returns above zero, you might think they are low risk and you can't lose money, but this is often not the case.
"A lot of absolute return funds are like hedge funds – they can do very well, but they can also do fantastically badly," says Ben Seager-Scott at Bestinvest. "To make returns that are higher than cash, they have to take risk and a lot of them have got it wrong."
One of the biggest problems is the failure of communication, says Mr Seager-Scott, as many investors are not made aware that returns are just 'targeted' rather than guaranteed or promised. "There's a lot of controversy over these funds not delivering 'absolute returns' but, at the same time, if you invest in a growth fund, and it doesn't always grow, you can understand that," said Mr Seager-Scott.
Indeed, in a report last year, Fitch Ratings says there is an increased risk of these funds being mis-sold, as there is no standard definition for an absolute return fund. However, the report forecast the absolute return sector will grow substantially as investors look to protect their money, while getting returns not dependent on the movement of markets.
Unsurprisingly, the Financial Services Authority (FSA) is on the alert. "Absolute return funds may pose a risk because consumers and advisers may not understand they could suffer significant unexpected financial losses if funds fail to perform," says an FSA spokesman.
Unlike most other funds, which are labelled according to the assets and sectors in which they invest, like UK equities or US bonds, a lot of absolute return funds don't make it obvious in the name and can use widely varying strategies to each other.
Some funds, for example, do not just buy stocks, but do 'shorting', where they sell a stock in the view it might fall in value and hope to buy it again when it is cheaper, to capture a profit. Although potentially profitable, shorting can be a complex and arguably risky game.
"Don't invest in these funds if you don't understand them," says the founder of FundExpert.co.uk, Brian Dennehy. "The whole point of these funds is they focus on managing risk, but the definition focuses on returns. The 12-month target is also nonsense," he adds.
Just looking at returns over the space of a couple of years shows how some of these funds can experience extreme movements, rather than provide you with a smooth ride, stable returns and a sense of security. "How can the CF Odey fund, for example, fit the absolute return description," says Mr Dennehy. "It's a worry there's that much volatility. The same with the Octopus fund – it doesn't fit this sector as there's lots of ups and downs."
Aside from these issues, some critics believe absolute return funds are also too expensive. "The average so-called Total Expense Ratio (TER) is 2 per cent but can often be considerably more as many of these funds charge a performance fee of 15 per cent to 20 per cent of the gains," says Mr Miller. "However this has not featured much recently as there has not been much in the way of absolute returns."
In fact, the highest reported cost of these funds was an astonishing 5.9 per cent a year, with a couple of others coming in not far behind at more than 5 per cent.
But to tar all absolute return funds with the same brush would be wrong, as some have delivered decent returns via a smooth journey. Mr Denney says the Cazenove Absolute UK Dynamic and Newton Real Return funds have both "worn stabilisers" and have had less volatile rides, while at the same time having fallen less than the stock market.
"Insight's Absolute Insight fund has also had low volatility, and an amazing performance track record," says Mr Dennehy. "We've been holding it for the last three or four years and have been very happy with it."
Emma Dunkley is a reporter at Citywire.co.uk
Fuel poverty could kill 100,000 vulnerable people over the next 15 years, charity warns
Phoenix Life: Chance of a refund for overcharged policyholders has risen
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Simon Read: That's right, BT, they'd rather pay for a free service
Bank-beating exchange rates on your international payments
- 1 Forget 'The Dress': Here are five of the biggest news stories you might have missed
- 2 The black and blue dress: Makers considering a white and gold version
- 3 PornHub turns masturbation into energy in bid to save the planet
- 4 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
- 5 Saudi Muslim cleric claims the Earth is 'stationary' and the sun rotates around it
New theory could prove how life began and disprove God
This is what it's like to be dead, according to a guy who died for a bit
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Ukip would cut billions from Scottish budget to fund English tax cuts
Russia's roadmap for annexing eastern Ukraine 'leaked from Vladimir Putin's office'
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
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