Absolute Return sector "not fit for purpose"
Many of the sector’s funds consistently fail to live up to their aim of delivering a return greater than zero and there is little else to connect them with one another.
By Mark Smith, Reporter, FE Trustnet
Friday May 18, 2012
The Absolute Return sector is too complex and wide-reaching for its constituent funds to be accurately compared, FE Analytics
Unlike other IMA sectors, Absolute Return
funds are defined by what they aim to deliver rather than what they invest in. Simply put, these funds aim to achieve a return greater than zero in all market conditions. However, as any seasoned investor knows, funds in every sector frequently fail to live up to their promises.
According to data from FE Analytics
, 44 of the 71 funds in the sector, or 62 per cent, have failed to deliver an absolute return over the last 12 months, with the average fund showing a loss of 1.64 per cent. Over three years, six funds have lost money, with the worst-performing – SVM UK Absolute Alpha – posting a loss of 23.06 per cent.
Only 44 per cent of funds have given investors a real return versus inflation over the last three years.
The positive return proposition has made the sector increasingly popular as macroeconomic risks continue to weigh on traditional equity investments. Over the last year nearly £5bn has flowed into it.
The main problem is that cautious investors who need products capable of maintaining their capital buy the funds on the promise of slow and steady returns and end up taking on more risk than is appropriate.
Industry commentators have long called for an overhaul of the sector.
"The Absolute Return sector is just poor," said Darius McDermott, managing director at Chelsea Financial Services.
"We have been saying for ages that it should be split on lines of volatility. Some of the funds in the sector are essentially high risk hedge funds. The funds we tend to recommend from it tend to be more straightforward market-neutral strategies."
CF Octopus Absolute UK Equity
is a good example of the type of strategy that McDermott looks to avoid.
Managed by David Crawford
, the fund’s stated objective is to deliver a positive return in all market cycles by investing in derivatives that provide both long and short equity positions.
Over the last three years it has been more volatile than any other fund in the sector and only one fund has returned less. Its annualised volatility score of 14.19 per cent is more in line with that of the average UK Smaller Companies or Global fund.
Performance of fund vs benchmark over 3-yrs
Source: FE Analytics
The FSA is currently undertaking work to assess the extent of the risk posed by the sector's funds.
"Financial advisers may not fully understand these products, which increases the possibility that poor communication of investment risks contributes to mis-selling to consumers," the regulator warned in its latest Retail Risk Conduct Outlook.