The attempt to clear up this Absolute Return funds confusion is an absolute mess

It's almost as if they want us to think that only they can understand the world of investment, to justify their high fees


The world of investment is complicated enough without
obfuscation from the industry. But a move this week to change the
name of one of the most misleadingly-titled fund sectors will only,
I suspect, make things worse.

The sector in question is currently known as Absolute Return funds. To the uninitiated the title is meaningless. To those in the know the title is misleading to the point of the funds even being mis-sold.

To step back a bit, the funds were so titled because they aim to provide positive returns regardless of market conditions. As such they proved hugely popular in recent years when stock markets proved less than reliable and returns fluctuated wildly.

Investors bought into the perceived security the name implies expecting positive returns - but many were left disappointed. When markets fell, Absolute Return fund managers were not really able to provide positive returns.

But even worse for investors are the fees. Not the upfront or annual management charges, but performance-related fees that many funds in the sector have. The performance relates to the fund manager being able to do better than its benchmark, which has meant fund managers getting bonuses - and investors paying the fees - even when their funds lost money.

So fund managers may feel they've earned the fees because they have been able to provide positive returns compared to an index or a particular investment benchmark, but investors facing losses would rightly feel aggrieved.

In short, the funds were sold on the perceived promise of being lower risk than many mainstream funds because the fund managers have more flexibility to use different investment techniques to avoid following markets into the doldrums. But down into the doldrums most went.

The whole issue left the situation where investors could be left believing they were buying into little risk, but when the risk of losing money was still substantial.

In fact the True and Fair campaign - which is fighting confusing fund fees - has calculated that the amount of money lost in Absolute Return funds that have failed to deliver positive returns in the last two years tots up to around £386m.

The Investment Management Association is the industry body which decides which funds should go into which sector and what the sectors are called. It is the trade body for asset managers who, collectively, manage around £4trillion of assets in the UK.

To clarify, if I can, a trillion is a thousand billion. So £4trillion looks like this: 4,000,000,000,000.

In other words, that's a lot of money. So the IMA carries a serious responsibility to investors as well as the fund management firms.

It admits that itself. Its literature states: "The purpose of the IMA sectors is to help advisers and consumers navigate through nearly 2,500 funds. Grouping similar funds via the sectors allows advisers and consumers to make like-for-like comparisons so they can make better-informed investment decisions."

But despite many calls for it to do something about the confusion surrounding the Absolute Return sector, it refused to change its name after a sectors study almost two years ago.

To be fair to the IMA, it has now acted after a fresh review of the sector. It concluded this week that all funds in the sector must, at a minimum, target positive returns in any market conditions.

That should help rid the sector of funds that fail to meet that criteria, so is a big tick for the IMA.

The conclusions continued: "All funds in the sector must state a timeframe over which they are aiming to meet their specified target. The target may not be longer than three years."

Again, that seems a positive move. If investors know and understand the target that fund managers are aiming for, that can help them make a reasonably informed decision about whether it's right for them to stick their hard-earned cash in the fund.

But then the IMA massively dropped the ball. It has decided to rename the group of funds The Targeted Absolute Return Sector. Its reason? "To ensure there is no doubt that positive returns are a target and not a guarantee", it said.

The only doubt is the sanity of the IMA. Adding the word "targeted" to the name of the sector will do nothing to help investors work out whether the funds really will achieve what they want.

Leaving the word "absolute" at the heart of the sector name will continue to suggest that the funds will produce positive returns. And that will mean investors will continue to be misled or even mis-sold the funds.

So we're still left bemoaning finance industry obfuscation. It's almost as if they want us to think that only they can understand the world of investment, to justify their high fees. But that's simply not true. Just ask any of the army of private investors who choose their own stocks and very often manage to beat the professionals.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

LSA (afterschool club) vacancy in Newport

£40 per day + Travel Scheme : Randstad Education Cardiff: The Job: Our client ...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Geography Teacher

£85 - £120 per day: Randstad Education Cheshire: randstad education are curre...

Teaching Assistant

Negotiable: Randstad Education Group: You must:- Speak English as a first lang...

Day In a Page

Read Next

Daily catch-up: low pay, E and non-E online, and the pointlessness of chess

John Rentoul

i Editor's Letter: There's a crackle in the Brum air

Oliver Duff Oliver Duff
Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style