The IA Targeted Absolute Return sector has returned less than 1 per cent a year to investors in real terms over the past decade, according to data from FE Analytics.
It is 10 years now since central banks around the world carried out the first interest rate cut in response to the financial crisis, with Britain, the US, the EU, Sweden, Canada and Switzerland loosening monetary policy in a bid to ward off the looming global recession and stimulate their economies.
In the UK, the Bank of England dropped rates from 5 per cent to 4.5 per cent. This marked the first of six cuts in six months and by March 2009, borrowing costs in Britain stood at 0.5 per cent.
This heralded the beginning of a lost decade for savers – analysis from Fidelity International shows someone who put £10,000 in the average savings account would now have a savings pot of £7,635.841, adjusted for inflation.
However, data from FE Analytics shows that someone who invested their money in the IA Targeted Absolute Return sector would have fared little better. The average fund has made 34.98 per cent over the 10-year period, just 9.13 per cent more than the consumer prices index (CPI). This equates to a compound annualised return of just 0.88 per cent in real terms.
Performance of sector vs index over 10yrs
Source: FE Analytics
Despite this poor performance, IA Targeted Absolute Return was the best-selling retail sector in the Investment Association universe in both 2015 and 2016.
Of the 24 absolute return funds with a track record of at least 10 years, eight – which between them have £1bn in assets under management – have returned less than the CPI over this time.
IA Targeted Absolute Return funds that have underperformed inflation
Source: FE Analytics
The worst of these has been Threadneedle Absolute Return Bond, which has lost 0.17 per cent in absolute terms. It is also down by 9.98 per cent over five years and 11.98 per cent over three 
.
Adrian Lowcock (pictured), head of personal investing at Willis Owen, said that while you would expect beating inflation to be a minimum requirement of absolute return funds, investors need to remember the sector is a “hotchpotch” of different strategies and sectors.
“You really have to look under the skin at the different funds to see if any of them are serial underperformers or outperformers,” he explained.
“You also need to factor in fees, because if you are paying higher charges, you should really be getting either better risk-adjusted returns or better returns.”
In terms of fees, the average ongoing charges figure (OCF) of the eight funds that underperformed CPI is 1.06 per cent – higher than the annualised compound growth figure for the sector over the past 10 years and well above inflation. In addition, five of the eight charge an additional performance fee for beating their benchmark.
Lowcock said he doesn’t like the idea of charging a performance fee for beating a benchmark as “that’s what an active manager’s job is”.
“Frankly a lot of the time the benchmarks are not usually that ambitious,” he continued. “They are usually just ‘cash-plus’. Bearing in mind this is in a low inflation environment, beating inflation shouldn’t be that challenging, particularly when you have a strong equity bull market in the background.”
Ben Yearsley, director at Shore Financial Planning, was also scathing about the fees charged by absolute return funds.
“I really don’t like this sector,” he said. “[A real return] of 1 per cent per annum is simply not good enough and no, investors shouldn’t be paying a performance fee for such lacklustre performance.
“Absolute return funds had their heyday pre-the financial crisis when interest rates were 5 per cent… funnily enough, many funds made decent returns during that period.”
He added: “I’m not surprised at the poor returns. Too many funds flatter investors without ever delivering what they are supposed to – i.e. an absolute return.
“The sector itself doesn’t help as there is a wide variety of funds found there – long, short, multi-strategy, low risk, high risk. This doesn’t help investors, in my view – I think many don’t really understand what they are invested in.”
In a recent article on FE Trustnet, Neptune founder Robin Geffen described the use of poorly performing absolute return funds in pension portfolios as ‘a moral hazard’, and that investors need to get more comfortable adding risk through the use of equities.
“We have this dichotomy with targeted absolute return funds because despite them having been the best-selling sector in 2015 and 2016, [investors say] they don’t have a place in a long-term pension portfolio,” he said.
“One has to wonder who is really buying them and how happy they are having them.”
At the other end of the scale, IA Technology & Telecommunications has been the best-performing sector over the past decade, with gains of 418.49 per cent, followed by IA Japanese Smaller Companies and IA North American Smaller Companies, with returns of 398.61 and 360.36 per cent, respectively.
Data from FE Analytics shows that if someone had simply invested in the FTSE All Share 10 years ago, they would have made 157.38 per cent.