The absolute return sector faces growing scrutiny as it approaches its third anniversary. When it was launched in April 2008, the peer group contained just 17 onshore and offshore funds. However, that number has since tripled, according to data from Financial Express, leading to concerns over the labelling of such products and the usefulness of grouping many diverse strategies under one banner.
The sector was unveiled by the IMA in response to a rising appetite for funds that, according to its definition, aim to deliver “more than zero returns in each year”.
The steady returns of Mark Lyttleton’s BlackRock UK absolute alpha portfolio had proved particularly popular with retail investors, encouraging managers to bring more absolute return products to the market.
But as the number of absolute return funds rose dramatically in 2008 and 2009, the disparate nature of their strategies became apparent. While BlackRock UK absolute alpha and Cazenove UK absolute target sought to grind out regular market neutral returns through pair trading, other funds in the sector were taking directional bets.
Several funds in the sector posted declines, prompting concern from the regulator that the abso-lute return name tag may be misleading for inv-estors. The FSA is reportedly advising firms not to use the label when launching new products and last week published a discussion paper on toughening its “interventionist” approach in relation to financial products.
The IMA, which welcomed the FSA’s proposals, is conducting its own review of the sector and may subdivide its peer group according to the timeframes over which products aim to generate an absolute return, allowing investors to compare different strategies more easily. The review forms part of a broader rethink on the classification system announced by the IMA last year.
Adviser Fund Index panellists appear broadly supportive of the FSA and IMA initiatives to protect consumers investing in the sector. AFH Wealth Management head of investment research Graham Toone says the peer group was a useful “starting point” in 2008 but product proliferation has left it in need of reform. He says: “I feel sorry for the IMA because there are so many apples and pears in the sector.”
Whitechurch Securities head of research Ben Willis agrees. He says: “If an absolute return fund is market-directional it can be quite volatile, for example. It may be less volatile than the market but it still could be triple the volatility of a market-neutral, stock-specific, grind out a steady Libor-plus fund. You have to get under the bonnet to see what investment approach the managers are employing.”
Neither Toone nor Willis favours the timeframe method for subdividing the sector, however. Toone says he would prefer a system that distinguishes between “more speculative” and lower-volatility products.