Absolute return funds: ten knockout facts

Article headline : Absolute return funds: ten knockout facts

so where are they?

What is risk? To someone dependent on his investments to pay for food and fuel, like most pensioners, it is not having enough return on the investments (and this can be income or capital gains).

Absolute return funds seem to give a lousy return whatever the state of the stock markets. To me, that makes them the very riskiest form of investment.

No thanks. And besides that, I don't understand how they work, so that's another reason for not investing in them.

These fund in general dont do what they are supposed to do ,and in most cases are more beneficial to the fund managers,they lose they win,they win they win more.

Absolute return funds - designed to give a positive return and therefore better than other funds/sectors.

So why do the majority of funds in this sector, according to Moneyfacts ILP for September 2010 appear to have lost money over a 1 year cumulative performance?

Absoulte return "zero" at best

Rob Mackinlay = Tim 'Nice-but' Dim from Harry Enfield

I hold two such funds. Artemis Strategic Assets is down 2% and the much heralded CF Octopus Absolute UK Equity is down 17%. I'm tempted by Standard Life Global Absolute Return Strategies Retail Accumulation but I know as soon as I invest it'll going the other way as happened with Octopus.

Most of these were released after the market tanked in 08 - just the wrong time to get in. I prefer funds in the CM and BM sectors like ruffer total return, miton special sits and troy trojan which act like the abs return funds should. newton real return and SL global abs return also look OK to me.

This sector is a minefield.

Absolute return funds should produce positive results regardless or market direction. If they achieve this then they are a useful complement to the normal long only holdings because they will produce smoother, less volatile returns at different times.

Therefore a fund's correlation to the index of the asset class it covers is a crucial consideration. Standard Life GARS is about 0.7 correlated to the FTSE. Replicating index returns via an absolute return fund makes no sense.

The second consideration is risk management. Take a look at volatility of returns as the approach 0. If volatility rises the maanger is not de-risking. That is not absolute return investing.

The vast majority of absolute return funds fail both these tests.

It is possible to creat a multi-asset, multi-strategy fund of absolute return funds with low volatiltiy and negligble bond and equity correlation. This fund would be a valuable addition to most portfolios.

Picking individual funds is like juggling chainsaws yet the vast majority of advisers who recommend absolute return funds do this.

Anything notional instrument that takes so long to explain and never comes to the point is best avoided.

If absolute capital preservation is a very important objective, plus a "reasonable" but probably unexciting upside, why not run your ruler over Ruffer's Total Return fund (classed as a Cautious Fund)

Compare it with the Absolute funds benchmark over the last 1, 3 & 5 years. I think it also fairs well against Blackrock's Absolute UK Alpha.

You forgot

11). Many of the funds mentioned are from companies that sponsor Citywire.

But honestly, don't you think you should disclose when you highlight or recommend a product from a company from which you take money? In my experience, Citywire is more guilt of this than most sites, and so I ascribe very little value to many of your reports.

There was a bloke in the States who said he could knock out a modest but bombproof return every month in all weathers, wasn't there?

Bernie M-something... wonder where he is now?

NB: the average UK rate of inflation over the past 30 years has been just over 4%. Sure you can't do better than that without paying the Absolute Return wonderkids their very handsome TERs and incentives?

Ptolemy - You're right that many fund groups advertise on Citywire and in our magazines. I can assure you it has NO bearing on our editorial output whatsoever - quite aside from the fact that our journalists wouldn't stand for it, we're an FSA authorised company (many of our peers are not) and they wouldn't stand for it either!

In any case the funds mentioned above are from Citywire Selection, which is built using quantitative criteria and is thus also free from commercial bias.

Hope this helps,

Rich

I did dabble in an Abs Ret fund thankfully not for long and hold Artemis Strat. Assets having returned just 15% over the past year I think its time to quit the snails.

Having sufferred with Pension provider funds for 20+ years I have decided to live life in the fast lane with AIM!!

watch out for those absolute return funds with "performannce fees"-often linked to Libor which is currently under 1%-a ridiculously low hurdle.I suspect many of these absolute returns are more about making money for the fund managers rather than the investors.

I had money in the Blackrock Absolute fund and it's performance was miserable - it's too big and is a lumbering monster that does nothing

"absolute return funds: 10 knockout obvious points"

If none of us are interested, it does make you wonder why IFAs have been recommending absolute return funds to their clients.

Oh hang on, what's this "commission" they're always moaning about . . . . . . ?

Can't understand those people who spout on about their favourite funds all over the internet.

Don't they know that it is progressively more difficult for a fund to outperform the bigger it gets ?

So they're really cutting their own throats.

I have used the Prudential With Profits Fund for some 12 years as an "absolute return fund".

Todate it has never failed in any single year to return a positve return and overall has returned 10% plus per annum to this point in time.

People have decried with profit funds for many years, the moral I suppose is "do not follow the herd" nor indeed jounalists who do not know what they are talking about!!!

Instead do you own research and then have confidence in it.

i had the blackrock fund but sold it for a small profit, had the newton real return fund that i liked due to no peformance fees and good yield, also have the jupiter fund which has done badly. I have sold the newton fund and will be selling the jupiter fund once im back in profit, all my other funds have done well but my own stock picking i.e amec, antofagasta, bp etc have done much better (100%, 61%, 40%) then the so called expertly managed funds

There's so much rubbish spouted on here sometimes. I'm in the SL GARS fund and in the last 12 months to today the fund has gained from 91.3p to 124.6p. Not bad at all and a useful part of my SIPP funds.

absolute return funds are mostly an absolute waste of time, run by the absolutely incompetent to be bought by the absolutely naive.

It might be better to ignore labels such as 'absolute return' and shortlist fund managers who performed well in the credit crunch, for further consideration. In other words, ignore what it says on the tin as it might not do what it says.

If ever a sector was inappropriately named it is this one. Created at a time of terror rather than fear, it carried loads of hype and many [myself included] took the bait.

A look at history on Citywire should have told us all it had a very different outlook - The only two funds around for 10years for example [Henderson and Gartmore] both show negative returns over 3, 5, and 10 years.

I invested in the new Jupiter fund at launch based on its mangers record [Gibbs], after a good start to the year on the wider markets things looked a bit iffy and I increased my stake because the moneymarket was paying next to nothing BIG MISTAKE - The problem is these are so complicated you can never judge if it will go up or down but there is no doubt the longer trend is down for this fund.

I am moving into Allianz PIMCO Sterling Total Return which has a more 'absolute record' - not exciting but steady and never a negative return over 1, 3 or 5 years

Interesting to see that you include the Ruffer Total Return fund in this sector, it is one of my core holdings but surely it is a Cautious Managed Fund and operates very differently from this model? Certainly performs much better!

If I remember correctly it was Jon Maguire at cru that first championed the 'absolute return' ethos. I think that enough is said when one considers this!

There are so many different managers and strategies under the absolute return heading now but most have similar things in common:-

- oeic commission charges

- sales hype, jumping on bandwaggon of circumstances at stage of economic cycle

- star manager based on past performance

- high performance fees

Look what happened to nearly all of them in the credit crunch.

You might be lucky and find a good one, but what about next year?

Last year I might have chosen Philip Gibbs fund highly recommended by nearly every IFA but his performance has been poor so far.

I seem to remember other "flavours of the month" in the fund industry which suffer abysmal performance and have gone off the front pages:-

"internet funds", "multi-manager funds", "precipice bonds", etc..

In my opinion all rotten investments and this appears to be no exception unfortunately.

Some of these funds-but not all-currently charge a performance fee of 15% on any return above libor-around .7%-yes the point is before the 7...in addition of course to a management fee of nearly 2%.....

No I cant believe they get away with it either......that is not even a real return with inflation at 3.5 %-oh and by the way they keep charging the management fee even when they are losing money.....

Here's a thought: could an investor make their own 'DIY absolute return fund'? Possibly with a bit of cash, gold and an ETF or two, and maybe something counter-cyclical. The investor would need to remember to charge him-or-her-self a suitably large fee.

Victor,

Good idea. I think we all unconsciously try to do this anyway to keep our savings and get some income, but with a minimum of cash and derivatives in the present low interest environment.

I thought that derivatives were originally only allowed to be used in OEICs as an insurance and to reduce volatility, not to act as a means by which the fund industry can get away with 20% fees for very little performance?

If a fund delivers on it's targets, regardless of fee structure, shouldn't this be all that concerns us? Many do not have performance fees in any case and are very competitvely priced. I suspect that this is due to many fund managers already having the spectre of RDR firmly on their horizon.

Anyhow, viewing absolute return funds in terms of their sector is a waste of our time as there is such a wide range of strategies, asset class, geographic biases as to almost as much of a waste of time as comparing strategic bond funds like for like. How can you compare BlackRock UK Absolute Alpha to Threadneedle Absolute Return Bond, or either of these to Standard Life GARS? Wouldn't you agree that such a diversity of delivering an "absolute return" makes a mockery of both the sector and also those who tar these funds with cries of "bandwagon" and "flavour of the month"? It's one thing to be contrarian, but do try to make at least some effort to back up your stance correctly...

As with any collective we must buy the strategies or processes we agree with and keep the fund only if it delivers on it's targets. If not, as with any underperforming long-only fund, it gets dropped at review. Any disciplined investment process will ensure this.

Agree with most of what Mark says but hasnt the retail fund industry always spawned bandwaggons with poor performing funds following the flavour of the month?

Yes "absolute return" covers a multitude of strategies, however the performance of most of these funds whatever their colour speaks for itself. Most of them do have performance fees, so any upside to cover bad years is capped.

Another big risk factor is that the stated "hedge fund" strategies of many of these funds you buy in to is flexible and can vary from year to year depending on manager's top down view, whatever the stockmarket performance.

For anyone thinking of investing in this sector, the Citywire and other independent analyses become more important so you know what you are getting, but it is no guarantee of future performance .