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94% of absolute return funds unsuitable

Only three funds in the Investment Management Association absolute return sector are suitable for investors, according to reseach from IFA Informed Choice.

Informed Choice reviewed all 51 funds in the sector through its own quantitative screening model. Only the Henderson Credit Alpha, Insight Absolute Insight and the Newton Real Return funds scored above its minimum 80 per cent threshold for suitability.

Around 67 per cent of funds in the absolute return sector scored less than half the amount possible once factors like consistency and cost were reviewed in the quantitative analysis.

The study revealed that two-thirds of the funds in the Absolute Return sector have a Total Expense Ratio of 1.6 per cent or above. A quarter of the funds have TERs exceeding 2 per cent per annum.

Informed Choice managing director Martin Bamford (pictured) says: “Absolute return funds are regularly criticised for their poor performance and high costs. This research demonstrates that criticism is justified for the vast majority of funds in the sector.

“So far this year we have seen regular bouts of stock market volatility as fears over the eurozone sovereign debt crisis continue. Absolute return funds should have been able to profit from these trading conditions, yet they fail to deliver consistent risk adjusted returns.

“Investors need to think very carefully before including absolute return funds in their portfolios.”

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  1. Couldn’t agree more. Most absolute return funds suggest they will bring in positive results whatever the situation. When more than half of them show a 12 month loss it’s time to bracket them with the Japanese Equity funds-execution only plus a disclaimer before we use them.

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