Smoothly does it with absolute return funds
These investment vehicles promise positive growth in bear as well as bull markets, but is it all too good to be true? Julian Knight investigates
Sunday 24 January 2010
For some, absolute return funds are an investment no-brainer; for others, they're nothing more than marketing flimflam. The argument for absolute return funds is a relatively straightforward one to make.
These funds, deploying many of the same investment tools – such as futures – used by hedge funds, aim to provide a regular return above what is available through a cash savings account, but with less risk than a standard stock market fund.
"The idea is to smooth out returns over the long term. You don't get years where you see 30 or 40 per cent growth or loss. Instead the idea is to produce steady returns comfortably above what can be achieved through a cash savings account," said Ben Yearsley from independent financial advisers Hargreaves Lansdown.
"If most investors were asked if they would like a fund which is geared to providing 7, 8 or 9 per cent growth year in year out, they would be delighted, particularly when you consider that a fund which mirrored the performance of the FTSE over the past 10 years would actually have lost you money," Mr Yearsley said.
Instead of just buying and holding shares that the fund manager thinks will increase in value, an absolute return manager is able to take positions which will make the fund money if a particular share actually falls in value. In addition, managers can invest in a mix of shares, bonds or cash accounts all with the aim of giving a smoothed return to the investor. Freedom for the fund manager is the name of the game but within the confines of a target to deliver an absolute return not just long term but every year.
Great selling point in a bear market, but in 2009 the UK stock market, against many analysts' initial forecasts, rose substantially. So far in 2010, there are few signs of the bull market abating. "It is difficult to say to an investor go for absolute return funds which can rise, say, 10 per cent when you see the stock market as a whole rising by a quarter in a year. Nevertheless I'm still a big fan," said Mr Yearsley.
However, David Kuo, a director of investment website Fool.co.uk, sees this as a bad time to be moving into absolute returns. "Sure there are some well-managed absolute returns funds out there but there are some poorly managed ones too. The truth is, though, that in this market just about any fund could make you money, so why go for the complexity and expense of absolute returns?"
But for Barry Norris, who manages the Ignis Argonaut European Absolute Return fund – as well a standard unit trust fund – the idea is to take the element of market timing out of the equation.
"With a standard unit trust you look to buy at a time when you believe the stock market it operates in will rise in value. Be successful and you make money, but if the stock market tanks then standard unit trusts are very likely to follow the index down. It is possible with a standard unit trust to have had a good year if it loses 10 per cent as against a 20 per cent loss in the overall stock market.
"The aims of an absolute return fund is very different and it's flexible enough to make money in a falling market. Absolute returns tend to give up some growth on the upside, but when the markets fall you should still be able to make money. Managers are in effect not measured against the performance of the overall stock market, but in the simplest terms do I make my investors enough money?"
Absolute returns is a relatively new investment sector: there are only six funds that have a track record of more than three years and new launches are occurring regularly. In many respects, it's still too early to tell if the claims made for absolute returns actually hold water, although some try. "Over three years, unit trusts invested in the UK stock market are down 10 per cent while absolute return funds are up 13 per cent," said Gordon Davidson, the managing director of Jupiter Asset Management Unit Trusts which has recently launched its absolute returns fund managed run by the hedge fund star Philip Gibbs.
"Philip Gibbs has produced a positive return for his investors every year since 2000. These funds are pretty sophisticated compared to a standard unit trust, and I think investors should look for managers who have a track record of successfully using the same investment tools – such as future contracts – which are available to hedge fund managers. This is where we think Philip comes in," Mr Davidson said.
But investors need to be aware that not all absolute return funds carry the same degree of risk. Some managers, it seems, are willing to take greater investment gambles in order to produce a healthier absolute return.
"This is a rapidly expanding sector with funds being launched regularly but it's far from homogeneous," said Mr Yearsley. "You could divide the sector into three: low, medium and higher risk. In short, a manager of a lower absolute returns fund will take fewer risks because they don't want to record a loss, whereas a higher-risk manager will take more chances trying to outperform the other absolute return funds. The Philip Gibbs fund is one of these higher-risk entities because he is not looking at achieving incremental returns and will, it seems, be taking bigger market positions than others," he said.
At the other end of the risk scale stands the highly rated Blackrock Absolute Alpha Return and Cazenove UK Absolute Target funds.
One thing absolute return funds do have in common is higher than normal charges; this is because managers levy initial and annual charges as well as routinely take a cut of any outperformance. "There is no getting away from the fact that these funds are expensive to invest in. They are a relatively low-return product and a big chunk of money comes out if they actually do better than normal," Mr Kuo said. Initial charges can be as high as 5.5 per cent – although this can be heavily discounted when buying through an IFA or a fund supermarket – with annual charges of 1.5 to 1.75 per cent.
But Mr Davidson defends the charging structure of absolute returns. "These funds are more sophisticated than a standard unit trust and use more investment tools which cost extra. But admittedly the charging of performance fees can be confusing to investors. The key is to seek advice and ensure that the manager is making a good case for the fees they charge."
Likewise, Mr Norris thinks that many observers pay too much attention to the charges levied. "Frankly, the issue of performance fees is overplayed. Fees are often triggered only if the fund delivers, say, more than 5 per cent growth after fees. In addition fees are subject to a high watermarking – so lose 10 per cent one year but make 5 per cent the next year and the investor won't get charged a performance fee as the unit price of the fund has to reach a new high before they come into play."
As for what role absolute returns should play in an investor's portfolio, opinion is divided. "I think of absolute returns as a good core holding. Invest in areas such as emerging markets for a bit of high return but high risk potential. Have some absolute return funds to produce steady growth. It's all about balancing risk," Mr Yearsley said.
But Mr Kuo sees the concept of absolute returns as simply too expensive and surplus to requirements. "Look, there are four major assets that you should have: property, shares, cash savings and bonds. Think of your portfolio of these asset classes as in effect an absolute returns fund. Try to balance these four asset areas to produce steady long-term growth rather than pay through the nose for a fund."
And in 2010 with the world economy showing signs of returning to growth, Mr Kuo sees the stock market as the place to be. "Over the past decade, investors have reduced their share holding and favoured property and, to a lesser extent, cash. This year, with savings accounts paying so little and with property market problems, I'd say it's the year to build up your share holdings but cost of investment is important," said Mr Kuo. "For starters look at an exchange traded fund such as the Blackrock iShares which buys into the stock market as a whole at a tiny cost and without the need to pay a fund manager."
Scam alert: make a big noise to beat the crooks
Bargain Hunter: Eurostar offers child fares for £1 each way to Paris, Brussels and Lille
Simon Read: 'BT Sport wants us to be couch potatoes on charges'
10 tips for taking out a personal loan
Bargain Hunter: Take your children on Eurostar on a £1 ticket
- 1 David Cameron refers to 83-year-old Labour MP Dennis Skinner as 'Jurassic Park'
- 2 Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
- 3 Optical illusion turns blue demon into brunette
- 4 German ethics council calls for incest between siblings to be legalised by Government
- 5 Saudi Prince Alwaleed bin Talal will donate entire $32bn fortune to charity
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
They are neither a 'state' nor 'Islamic': Why we shouldn't call them Isis, Isil or IS
Tunisia beach attack: How can British Muslims respond to the latest outrages?
iJobs Money & Business
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...
Day In a Page
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
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.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
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 six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
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.
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.