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Popular absolute return funds promise a profit come rain or shine – but performance study shows only a fraction achieve it

Published:14:41 BST, 2 July 2013Updated:15:17 BST, 2 July 2013

The dismal performance of funds designed never to lose money has been laid bare by an industry study showing only 13 per cent achieved this goal over the past two years.

The shock result comes at a time when wary investors are pouring money into absolute return funds amid fears over the safety of shares and bonds in volatile financial markets.

Absolute return funds have the stated aim of achieving a positive return no matter how well or badly markets are performing.The industry figures show huge variations in the performance of the funds and their respective ability to return a profit to investors come what may.

Absolute shocker: Absolute return funds are supposed to pursue strategies that deliver positive returns come rain or shine.

Only eight out of 62 absolute return funds have achieved a perfect score in a survey of their rolling 12-month performance over the past couple of years. [Check out the full results below.]

A further five funds have managed not to lose money in any month since they were set up, but are too new for a full record to be compiled.

Absolute return investing is when a fund manager tries to achieve a positive return no matter how well or badly markets are performing.

They might invest in a wide variety of ways to achieve this goal – including shorting or making a bet that an asset will fall in value.

The volatility of stock markets since the financial crisis began in 2007-2008 has prompted more investors to take an interest in the sector.

Meanwhile, some 14 funds have racked up negative 12-month returns at least half of the time over the past two years.

Two funds have been in the red for a staggering 21 months out of the 24 under scrutiny – GLG Alpha Select Alternative and RWC Cautious Absolute Rate & Currency.

Although even the most successful investment funds can lose money sometimes, absolute funds are supposed to pursue strategies that deliver positive returns in any market conditions.

They have come under fire for high charges – including in some cases easily achievable performance fees – and complexity as well as poor performance.

The rolling performance analysis was carried out by industry body the Investment Management Association following a recent review of the sector. This saw it renamed to Targeted Absolute Return to ensure there is no doubt that positive returns are a target and not a guarantee.

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The IMA compiled results up to the end of May with figures taken from Morningstar, and plans to update them monthly from now on. You can find its study on the IMA websitehere- click on the Monitoring information link on the top right of the page.

IMA boss Daniel Godfrey says: One key purpose of the absolute return sector review was to make sure that consumers do not inadvertently perceive there to be some implicit guarantee of positive returns due to the name of the sector.

He adds: We will also keep a close eye on performance and, should it become necessary, set performance criteria, which could lead to a funds expulsion from the sector on performance grounds.

City watchdogs have also been monitoring absolute funds. They get a mention in the risk outlook for 2013 as an example of a product where some consumers have misunderstood the risks they have taken on in their search for yield while interest rates remain low.

These products were often marketed as lower risk than was in fact the case, says the Financial Conduct Authority in the report.

This has left many with performance expectations and needs that do not align with the real performance of the products they hold.

Ordinary investors piled 218million into absolute return funds in April, making it their third favourite sector, according to the most recent IMA figures.

It hit the top spot in March with sales of 334million – the highest monthly sum raked in by the sector since December 2009.

A lot of the cash is going into the vast 18billion Standard Life Global Absolute Return Strategies fund. This has done the business for investors with a 42 per cent return over five years.

Why are absolute funds so popular right now? Investing experts say its because people are worried about their other options.

They are put off bonds because the market has become so warped by the massive emergency support programmes run by central banks like the US Federal Reserve. Meanwhile, stocks are already seeing high volatility in mere anticipation of the unwinding of such measures.

Traditionally lower-risk investors have allocated to bonds but because of the distortions caused by quantitative easing, these have become expensive, the risks have increased and government bond yields are lower than inflation, says Jason Hollands, managing director of financial adviser Bestinvest.

Investors have had to look elsewhere for low volatility investments and this is why absolute return funds have come on radar.

Additionally, there are other investors who have begun tactically allocating into these funds following the stellar rise in the equity market and on the back of fears about a China slowdown and an end to quantitative easing.

Martin Bamford, boss of financial planning firm Informed Choice, says absolute funds are probably popular in the absence of anything better, because investors are sceptical about equities and bonds.

Many IFAs recommending them havent had anything too substantial to recommend in terms of strategy or philosophy, he adds.

Standard Life Global Absolute Return Strategieshas returned 41.63 per cent over five years, 14.85 per cent over three years, 5.23 per cent over one year and 1.7 per cent over six months. Its down 1.58 per cent in the past three months.

In the IMA study of rolling 12-month returns in the absolute fund sector, GARS had three monthly stints in the red in the two-year period to May 2013. [See full results below.]

Absolute funds have returned 14.01 per cent over five years, 9.49 per cent over three years and 5.90 per cent over one year across the sector as a whole. Performance has worsened of late with a 2.69 per cent return over six months and 0.02 per cent over three months. [See chart above.]

But Hollands suggests that the sector-wide figures are pretty meaningless – since funds follow such varied strategies to achieve positive returns in any market conditions, you need to examine their individual approaches before you invest.

These differences are illustrated by the wide range of results in the IMA survey of 12-month rolling returns. While some funds have an almost unbroken record of failure, others managed to stay in the black every month.

Meanwhile, Hollands says that performance has generally disappointed in recent years in part because different markets and and asset classes have been so correlated due to central bank interventions driving markets since the credit crisis.

These funds essentially try to make money out of the anomalies and differences between markets and asset classes, so when everything has moved in tandem, this task is more difficult, he explains.

As we start the path of returning to normalised conditions, markets and asset classes are starting to become less correlated. This should be a more conducive environment for absolute return funds: providing the manager gets it right.

Bamford says what appears to have happened is that absolute funds have brought hedge fund prices and strategies to the retail investing space.

For an investor to understand some of those strategies is too much to ask, he says. We have seen so many horror stories of people investing in things they dont understand.

A fund like the extraordinarily popular Standard Life Global Absolute Return Strategies – often referred to simply as GARS – has a management team running 30 investment strategies at once.

Bamford says that even if an investor does grasp all the strategies on day one, they could change later to ones they do not.

Source: Investment Management Association and Morningstar

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