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Trawl order

With inflation at a 10year high, pundits are wondering where people should invest so we can outpace inflation over the longer term.

Threadneedle head of government bonds Quentin Fitzsimmons reckons he has the answer – it is funds that create “cash-plus” returns irrespective of the investment conditions. In other words, absolute return funds.

Fitzsimmons argues that these incremental returns are achieved by using techniques more normally associated with hedge funds – such as the use of derivatives to short investments. Absolute return funds also have greater flexibility than traditional funds.

“From high yield and emerging markets to government bonds and currencies, these funds can identify opportunities across the fixed income spectrum,” says Fitzsimmons, adding: “Think high yield will underperform emerging markets or that the euro will strengthen against the pound? Or that one bank will suffer solvency issues while another gains market share? Or that long-dated index-linked gilts will outperform short-dated conventional gilts?”

He says that it is all relatively straightforward for a fund manager to construct positions to benefit from all of these views. If only it was so straightforward.

Within four years of the first being launched, we have had two disastrous “return” funds already – both of which are no more.

First there was the almost instant demise of DWS RateBuster which promised a return of 3 per cent above base rate but closed a year later, returning zilch.

Now we have the closure of the Credit Suisse target return fund.

In 2004, the Credit Suisse press release announced the launch of the target return fund that would be: “A core product for the risk-averse investor seeking to deliver a positive return whatever the conditions of 2.5 percentage points above Libor.” In fact, it has plunged by 19 per cent during the past year.

Credit Suisse says the fund has been closed because it was uneconomical to run and that it did not expect a huge amount of inflows.

I would say it was disaster from start to finish and it should hang its head in shame – perhaps it is fortunate that advisers and investors were sceptical from the outset, otherwise it may have attracted a good few more millions than it did.

I have been critical of many of these funds that aim to deliver a cash-plus return – be they dubbed absolute or target return – in the past and with good reason. Performance has been sketchy from many.

The trouble is that the premise of the funds may be simple but the underlying strategies are not. I find it ironic that the Nationwide Target Return fund simply uses asset allocation of fixed interest, equities and cash for the fund – not a derivative in sight. It is up by 3 per cent over the past 12 months – not on target but positive at least.

Other funds that have struggled in the past year to deliver a positive return include JPM balanced total return, UBS targeted return and Allianz Pimco total return.

But let’s not dwell on the negatives. As with any sector, there will be one or two bright sparks. To be fair to Fitzsimmons, he has generated a 10 per cent return in the past 12 months and just over 2 per cent year to date. Perhaps the one to really stand out is BlackRock’s absolute alpha managed by the highly regarded Mark Lyttleton. The fund is up by 15 per cent over the year and nearly 9 per cent since January.

The IMA has just created an absolute returns sector which saw net retail inflows of nearly £160m in the first month of its existence. But it is evident that advisers – just as with any sector – are going to have trawl through the dross to ensure they pick a winner although Lyttleton looks a good place to start. A new sector will undoubtedly spawn more new funds – some of which will simply be bandwagon jumping. I suggest that BlackRock revise its sales targets for absolute alpha upwards – it stands a good chance of hitting them.

Paul Farrow is personal finance editor at the Telegraph Media GroupMoney Marketing


Inheritance tax when it is relevant

Neil Jones is Technical Support Manager with Canada Life’s ican Technical Services Team. Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland. A trust can offer significant advantages when an individual is […]


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