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Absolute beginnings

After months of consultation, the Investment Management Association has started an absolute return sector for funds that target positive returns in all market conditions. It initially comprises 17 funds, of which five are UK-based.

It will be the first IMA sector to have no assetbased monitoring. There will also be no performance comparisons as the fund objectives, benchmarks and and risk characteristics are likely to be too diverse.

IMA director of markets Jane Lowe says: “The purpose of an absolute return sector is to provide consumers and their advisers with a peer group of funds to analyse. Funds in the sector may be used in a number of ways, for instance, to provide further diversification within a portfolio of assets.

“Performance comparison is not appropriate at this early stage but other aspects of the funds may be compared, for example, charges, timeframe and stated strategy. A 12-month review will allow time to see how the sector matures.”

Absolute return funds use financial derivatives to generate positive returns in all markets, a requirement that has become the priority of most investors given the changing market conditions following the start of the credit crunch last summer.

One successful fund to come to market is BlackRock UK absolute alpha which has increased in value every quarter since inception in April 2005. The £880m fund returned 4.41 per cent in the first quarter of 2008 against a 9.85 per cent fall in the FTSE All Share index.

BlackRock managing director of the unit trust business for UK retail Tony Stenning says: “We support the absolute return sector as a first step in the right direction for these funds. We decided to place the UK absolute alpha fund in the unclassified sector previously as we felt that the raft of sectors it could have sat in did not reflect the nature of the fund. It would not be comparing apples with apples. It would not even be comparing apples with bananas.”

BlackRock increased its share of new business on Cofunds to 18.98 per cent in the first quarter of 2008 compared with a 2 per cent share of net sales in 2007.

Chelsea Financial Services managing director Darius McDermott says: “These products look to achieve their aims through many different strategies, whether it be pseudo-hedge fund, fixed interest or multi-asset. There are so many variables to achieving their goals and the majority of these funds are not that old, so questions are still being asked.

“Although you have seen 17 funds move into the sector, a number of others are likely to fit into the strategy but have chosen to steer clear.”

Hargreaves Lansdown investment manager Ben Yearsley says: “It is a step forward to introduce a sector that does not compare funds with their peers. For IFAs, the case is the same in that they must choose funds that deliver in varying markets but you cannot compare the likes of BlackRock UK absolute alpha with Standard Life Investments institutional global absolute return strategies.

“I do think it is a better comparison for all absolute return funds to be in one place rather than spattered across all different sectors, such as balanced managed, where they could potentially struggle if the market turns more aggressive.”

However, some people feel more should be done to offer fund comparisons.

JP Morgan Asset Management head of UK sales Jasper Berens says: “The absolute return sector is a good idea but I am concerned about the IFA level of understanding. The premise that a fund garnering 8 per cent a year is better than one garnering 6 per cent is not true when it comes to absolute return funds as they may take different risks to achieve those goals. I would say that banding funds that look to achieve cash plus one, plus two or plus five is a more attractive way for investors to decipher the right funds for them.”

Remarking on the absence of the JPM cautious total return fund from the sector, Berens says: “JPM cautious total return fits in with the definition of the cautious managed sector in that it offers 60 per cent or less in equity and 30 per cent in fixed interest or cash.”

London and Capital head of UK retail distribution Jamie Farquhar says: “I believe that a sector defined by volatility over returns is an idea that would not be too difficult to make a reality. All that would be needed is for the IMA to create appropriate volatility sectors and let the fund managers populate them with funds that fit those volatility boundaries.”

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Jeremy Pearson is Technical Support Manager with Canada Life’s ican Technical Services Team. Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland. Many parents value the standard of education offered by […]

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