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FSA concern at absolute return fund labelling

Fund firms say the FSA is privately advising them against using the term “absolute return” when launching new funds as it creates the impression that growth is guaranteed.

OPM Fund Management chief investment officer Tony Yousefian was planning to launch a fund using the absolute return label, but says the FSA expressed concern over the term and he has opted for diversified target return instead.

Another big fund group has told Money Marketing that FSA concerns about the absolute return label have led it to consider renaming one of its funds.

Yousefian says: “The FSA has told people to steer clear of words like absolute return. When submissions are being made to launch a fund, that message comes back quite strongly.

“The term really is quite misleading and it needs to be qualified. I totally agree with the FSA that these things need to be much clearer and more defined.”

In May 2008, the Investment Management Association launched an absolute return sector which now contains 50 products. Morningstar data shows that six funds have lost money over the past year.

Absolute return funds have proved popular with retail investors since the financial crisis. The most popular are the Standard Life global absolute return strategies fund, now running £6.5bn of assets, and BlackRock’s £2.1bn UK absolute alpha fund. Most recent IMA statistics show gross retail absolute return fund sales of £407m for last November.

An IMA review of the absolute return sector, scheduled for April, will consider the name of the sector and possible sub-categorisations. In August, the IMA said funds not stating the aim to deliver an absolute return over a 12 month time frame in their fund literature could be kicked out of the sector.

Skerritt Consultants investment director Andy Merricks says: “The term absolute return has been a bit misleading when seen in context with some of the funds that go under that name. Absolute rubbish may have been more appropriate.”

The FSA declined to comment on the issue.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. lyndon Heppolette 13th January 2011 at 8:55 am

    Whilst I agree that the absolute return moniker is misleading, is it really any different than a UK growth fund that doesnt grow?

  2. Indeed not, and a good point, its an indication of the funds objective at the end of the day, Growth, Income, Abs return (bearing in mind this is effectively the mantra of a hedge fund, which lets be honest is what this is)

    Clients are issued a prospectus and key features outlining this fact, which they should be reading!!!

    If we take this to ‘n’th’ degree what do we end up with?

    Blackrock Fund 1?
    L&G fund 386?

    Fund managers will be to scarred to provide any real idea of the funds objective in the title, surely meaning the communication of the fund then becomes complicated and un-clear??!

    More to think about on top of everything else

  3. I smell the prospect of a £3m report on and analysis of hedge funds being commissioned by the FSA so they can get a real handle on the issues involved. Hey guys ~ why not save the money and instead just read the article in a recent edition of Money Management? Or is that too simple and cost effective?

  4. Not more micro moaning by the FSA. As Julian says – another excuse to spend a few more millions!

    I’m proud to say I’ve been working with the very first investment managers in the UK who were talking about Absolute Returns active management & hedging strategies, alternative uncorrelated assets & the advantages of holding gold etc since 2003.

    One of their OEIC funds is still one of the top performers in the AR sector, despite being fairly cautiously managed.

    More to the point they are decent guys who I know & trust personally.

    I took the decision that client’s portfolios were better handled by the professionals where applicable rather than me or the life offices – long time since – Freeing me up to do the things I do best for clients.

    Unfortunately since then the whole world & his mate seem to have been jumping on the bandwagon of Absolute Return

    I make no apologies to the FSA for choosing this route & actually my clients are rather pleased I did!

  5. Alistair Cunningham 13th January 2011 at 11:53 am

    I’ve been banging this drum for some time as:
    a. Returns are by definition NOT absolute (i.e. positive) but also
    b. How do you value some of the highly complex investments they hold (e.g. Options) “a little bit more than they were yesterday” is not good enough!

  6. Our industry is riddled with misnomers.
    Many of the Bank Sales people call themselves Wealth Managers. This is unquestionably misleading as most laymen would assume that the wealth being managed is the customers….

  7. Absolute returns seems pretty accurate.After all the product provider is always guaranteed a return ,however much they lose for their clients.Investors only require a couple of things to make them happy,far lower charges and fabulous returns.Not a lot to ask don’t you think?

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