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An absolute mess?

Advisers are calling for a clean-up of the absolute return sector as funds continue to trail behind their benchmarks.

Amongst the biggest fallers are WAY’s EFA absolute return portfolio which is down 11.26 per cent over one year at June 26, 2009, according to Lipper, and Skandia’s alternative investment fund, which slipped 9.96 per cent over the same period.

The Investment Management Association stipulates that absolute return funds are: “managed with the aim of delivering absolute (i.e. more than zero) returns in any market conditions.”

Hargreaves Lansdown senior analyst Meera Patel says there is likely to be more rationalisation in the absolute return space given losses that are taking place in the sector.

She says: “It need to be addressed why some of these funds are down so much. The IMA have been quick to kick funds out of the sector in the past if they’re not meeting the objective by their definition. If a fund is down 0.5 per cent over one year there’s room for a bit of forgiveness but if it’s over 10 per cent down that’s definitely not meeting the objective whatsoever and it should not be in the sector or labelled as absolute return.”

Brewin Dolphin divisional director Stephen Ford has also raised concerns about the ability of absolute return funds to meet client expectations.

At the recent PIMS conference Ford said he would never run an absolute-return fund and expressed concern about stochastic modelling techniques.

He said: “Where are the 30-year absolute return funds? Please let me know. I have a problem with absolute return funds, I would never run one. Am I going to sign up to deliver absolute returns despite all the unknown unknowns? In terms of expectation management, that is an area that will cause problems.

Truestone technical consultant Ben Stevens says: “There’s going to be a large amount of confusion within the IFA community and also from clients who will say ‘you told me this fund was absolute return and would deliver positive returns in any market conditions’ but I’ve just lost 10 per cent. The area has to be looked at by the industry.”
Have you and your clients been disappointed by the performance of an absolute return fund? Are they just the latest fund fad?

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There is one comment at the moment, we would love to hear your opinion too.

  1. AB RET Funds
    I believe we IFAs are right to be concerned with absolute return funds as a class, and certain ARFs individually. The issue is not simply poor or lower than acceptable returns – how can a fund legitimately be in this sector and produce returns of 50% in a year?? That is by irrefutable logic a high-risk fund with equity characteristics! A real wolf in sheep’s clothing of a fund! I fear for investors when the positive tide turns negative.

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