Fitch has warned that absolute return funds pose an “increased risk of misselling” which may lead to “potential disappointment” for less sophisticated investors.
Fitch has warned that there is a wide range of funds that share the objective of positive total returns on a consistent basis over the medium to long term and no commonly agreed definition of what effectively constitutes an AR fund.
In Fitch’s view, this poses an “increased risk of misselling”, as absolute return funds gain traction in the retail market.
It adds “Furthermore, with greater emphasis on liquidity and downside protection, AR funds are not meant to fully capture market upside, which results in modest returns, leading to potential disappointment for less sophisticated or informed investors.”
Fitch Ratings has published a sector update on absolute return Ucits funds, recognising the need for investors to understand this fast growing, sophisticated segment of the market.
The European absolute return fund market, as defined by Lipper categories, has grown by 80 per cent since January 2009 to €140bn in assets under management in March 2011, thereby passing the peak of 2007. Fitch forecasts the sector will continue to grow, driven by sales rather than performance.