More than half of Absolute Return funds have failed to beat inflation over three years, according to an FE Trustnet study.

In the past, poor performance over one year has been highlighted as a cause for concern, but new data reveals that funds of this kind fail in the medium-term as well.

Of the 35 funds in IMA Absolute Return with a long enough track record, 19 – or 54 per cent – have underperformed the UK consumer price index (CPI) over three years.

Six of these have actually lost money over the period, with the worst performer, SVM UK Absolute Alpha, down more than 22 per cent.

The fund, which has lost 13.44 per cent over one year, aims to beat cash returns over a 12-month period.

Performance of fund, sector and index over 3-yrs


Source: FE Analytics

The average Absolute Return fund has fallen short of inflation by 0.52 per cent since July 2009.

The list of 19 features some of the largest funds in the sector, including Mark Lyttleton’s £910m BlackRock UK Absolute Alpha portfolio, which is down 1.8 per cent, as well as the £447m Threadneedle Absolute Return Bond and £185m Cazenove UK Absolute Target funds.

Both the BlackRock and Threadneedle portfolios have also fallen short of cash, measured by the Bank of England base rate.

Adrian Lowcock, senior adviser at Bestinvest, claims the figures reflect the lack of quality in the sector.

"Unfortunately, this isn’t something that surprises me," he said. "Some funds measure themselves versus Libor, but inflation is the most important because the reason why anyone invests is to achieve a real return."

"I can understand why a fund may defend itself for not achieving an absolute return over one year, but over three years that’s particularly poor."

"Retail investors care more about the medium- to long-term, while over one year it’s probably something that would concern an institutional investor, who will switch their holdings more regularly."

"A lot of these funds don’t have a very long track record and the managers don’t have a lot of experience running this kind of strategy."

If the 12-month Libor rate is used rather than the CPI index, 12 out of the 35 funds, or 34 per cent, fail over three years.

In spite of his criticisms of the sector, Lowcock does not think investors should abandon the idea of holding an Absolute Return fund altogether.

"You’ve got to look a little bit harder for quality in this sector, but there are options," he said.

"The Standard Life GARS fund is very strong and the mass inflows don’t seem to have made too much of a mark on performance," he added.