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Advisers question IMA’s absolute return sector plans

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IMA chief executive Daniel Godfrey

Advisers have questioned whether the Investment Management Association’s decision to rename the absolute return sector as the “targeted absolute return sector” will benefit investors.

The IMA has defined the targeted absolute return sector as funds managed with the aim of delivering positive returns in any market conditions, but returns are not guaranteed. Funds in the sector must clearly state the timeframe over which they aim to meet their stated objective to allow the IMA and investors to make a distinction between funds. This timeframe must not be longer than three years.

The trade body plans to publish data to demonstrate how consistently each fund in the sector has produced positive returns over rolling one year periods. It says it will monitor the sector to determine whether there should be rules that lead to the exclusion of funds from the sector on historic performance grounds.

The change of name of the sector will come into effect on 1 June. Firms have until 20 May to confirm to the IMA whether they intend to remain within the sector.

The issue of renaming the absolute return sector has divided the industry since the IMA began its review in May 2011, leading to delays in agreeing the new name.

The IMA floated three options as part of its review; sub-dividing the sector according to which funds were targeting more stable outcomes; sub-dividing the funds by hedge fund-style categories such as long/short or global macro strategies; or to keep the funds within a single sector but rename and redefine it.

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Adrian Lowcock

Hargreaves Lansdown senior investment manager Adrian Lowcock says retaining the word “absolute” means worries about investors being misled will continue.

Lowcock says: “The word absolute is still likely to suggest to investors that there is some implicit guarantee of positive returns.

“Adding targeted to the name does not clear this up and it could make things worse, investors may now interpret that funds in this sector are targeting a specific absolute return.

“This highlights the importance of translating industry jargon into terms that should be used for communications with investors,” he adds.

Lowcock suggest that the sector should be renamed “targeted return sector” instead of “targeted absolute return sector”.

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Rob Reid

Syndaxi Chartered Financial Planners managing director Robert Reid is also critical of the renaming, suggesting it will do little to help investors. He says: “This is just tautology. The problem is the name “absolute return’” does not work, as the funds in the sector have not performed.”

Reid adds: “If the IMA has paid anyone to carry out this review it should be asking for its money back.”

In contrast, AWD Chase de Vere head of communications Patrick Connolly is more positive about the changes. Connolly says: “The absolute return sector definitely does need to be renamed.”

“The existing name was misleading and many people that invest in absolute return funds probably do not have a good idea of what they are getting and where there money is being invested.”

He adds it is difficult to come up with an accurate description of a sector which has funds doing so many different things.

Bestinvest managing director Jason Hollands believes the IMA’s conclusions look “broadly sensible” though he highlights that there will still be a very diverse range of investment strategies lumped together within the same sector.

Hollands says: “As it currently stands the dominant categories are long/short (35 per cent), followed by global macro (16 per cent) and credit (13 per cent). There will also be a potentially wide range of targeted returns on offer, over different timescales.”

He warns: “This means that simple, comparisons of funds against the “sector average” will need to be treated with caution.”

Hollands hopes the IMA’s new online filtering tool for investors will help address this issue.

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Gary Potter

F&C Investments co-head of multi-manager Gary Potter is positive on the IMA’s decision to rename and redefine the sector.

Potter says: “I applaud the greater definition of targeting what the funds are able to achieve. In the absolute return sector you have market neutral funds and directional funds that all sit in the same sector. I am all for the increase in transparency on fund objectives.”

“Any definition tightening which means there is less scope for slippage and/or a greater transparency for objectives so people know what they get when they get into it is a good thing.”

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