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Power absolute

With the credit crunch celebrating its first birthday the search for a safe haven has seen absolute return funds rise to become the biggest thing on many an adviser’s radar.

Indeed with the UK all-companies and UK equity income sectors on average losing 20.7 and 23.2 per cent respectively in the last year, many a finger has already been burnt, adding to the momentum of the products.

Earlier this year, the Investment Management Association introduced an absolute return sector to cater for many of these funds – it was the most popular in June 2008 taking in £214m of assets – but all hasn’t been rosey in the garden as not all of these products have returned what they have promised.

On the one hand, BlackRock’s UK absolute alpha has built up a head of steam that would make any Olympic runner proud, taking in the best part of £800m as the biggest seller on most platforms, and who can fault the fund after it has returned 13.7 per cent in falling market in the last 12 months. However others have not been so fortunate.

UBS absolute return bond has lost 26 per cent in the past 12 months and sits bottom of the IMA global bond sector in that time.

While that performance is below-par by anyone’s standards, the problem that much of the industry faces is one of education as although the investment remits of these funds are often poles apart many expect positive returns in all markets.

Then there is the question of performance of these products in the long-term as the likes of BlackRock UK absolute alpha is one of only a few that has been tested in differing market conditions.

Questions of how these funds will handle scale once fund managers start running larger assets have also yet to be tested as has investor appetite once the market turns. Will they be keen to accept steady returns when a bull market is raging along and you can get a return of 20-30 per cent from the likes of the UK all-companies and UK equity income over 12 months?

There in lies the educational gap. There is an undoubted niche for these offerings, particularly for those approaching retirement who want little or nothing to do with market volatility, but absolute return funds have to stand up to the test now because a failure to return in these markets will mean adviser and investor confidence in these product will take a long-time to rebuild.

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