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
  • @simonnread

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.