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Absolutely fabulous?

Matt Goodburn finds that Standard & Poor’s new sector classification for absolute return funds has split opinion in the investment business

The move by Standard and Poor’s to create a new sector classification for absolute return funds acknowledges the recent growth in the sector as several fund firms look to deliver absolute returns to investors using the new Ucits III legislation.

S&P associate director Kate Hollis says: “We are the first people to draw a line in the sand and set down criteria on what an absolute return fund is and try to differentiate for investors between funds that hopefully do not lose money in down markets and funds that try to make money in up or down markets.”

Funds will be categorised as absolute return funds if they are able to show that they are benchmarked against cash and are able to net short market risk. They must aim for a cash return of at least 100 basis points over Libor before fees, irrespective of how markets are performing.

The new sector has been welcomed by Threadneedle Investments, whose absolute return bond fund matches the new criteria.

Co-manager Quentin Fitzsimmons says: “Absolute return vehicles should not be measured against long-only funds as they are aiming at a quite different pattern of risk and return, which is why they are useful in diversifying a portfolio.

“This is a new type of sector in the UK and the more that respected firms like S&P can help advisers understand the characteristics of the sector, the better use they can make of it.”

But Investment Manage- ment Association head of communications Mona Patel does not believe there is a need for a new category.

She says: “Our members have been consulted and have said no to an absolute return sector either now or in the future. We found there was no real appetite for a reclassification as people did not have the funds to go into it.

“With absolute return, you need to know what you are talking about and it can mean different things to different people.”

Merrill Lynch Investment Management managing director Richard Royds says the most important element determining the characteristics of an absolute return fund is the period of time over which the investor expects to make money. He believes the IMA is right not to add a sector.

He says: “I can understand why the IMA is not ready to set up an absolute return category because the investment horizon will dictate how much return there is from the fund involved. Our absolute alpha fund looks to make money in all market conditions and not lose it over the short term.”

Royds believes that more absolute return funds will be launched as investment houses look to adopt the new Ucits III guidelines.

He says: “My view is that most progressive fund managers will have absolute return funds at the top of their agenda. I cannot think of another category that will capture advisers’ imagination any more than absolute return,” he says.

Bestinvest commun- ications director Justin Modray believes the sector will grow but warns that investors need to be cautious over absolute return funds.

He says: “S&P’s new category is a step in the right direction. It will only include absolute return equity funds that can net short. Most IFAs will be looking at onshore funds in this sector but currently they have just one or two long short funds in the UK in the category.

“If Joe Public sees absolute in the title, they may think it is a safe investment but they have to make sure it does what it says it will because most have failed to get near their target in the last year.”

Close Fund Management managing director Marc Gordon believes the Ucits III rules have thrown up many descriptive terms that have confused the market.

He says: “Some say the definition of an absolute return fund is that it never loses you money and others say it always makes money. Others say it is a fund that doesnot follow a benchmark, so a lot more clarity needs to be given to investors.

“We would say we run the only absolute return fund in the marketplace. You will not lose money in the escalator 100 fund and it locks in gains every three months.

“At the moment, we are in the guaranteed protected sector but believe our best definition would be absolute return. S&P has launched the absolute return sector but there are not many absolute return funds and most others have very little track record.”

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