Absolute Return funds are designed to provide a profitable return regardless of whether the market goes up or down. It sounds like the perfect solution for investors who don’t want to risk their money. But not quite.
Fund performance has not exactly lived up to the hype. The volatility of stock markets since the 2008 financial crisis led to a massive increase in interest in the absolute return sector. The place to be if you felt markets were jumping around.
But as Andrew Merricks, head of investments at Skerritts Wealth Management explains, the last time that there was a meaningful correction was in the January of 2016 and the majority of absolute return funds did not do what they promised on the tin.
“At the time, we were quite confident that the markets were due a tumble of some proportion and so we tried to defend our portfolios by going overweight absolute return funds.”
He adds: “It’s not making the mistakes that cost you; it’s failing to learn from them. One or two of the absolute return funds that we invested in were absolute rubbish in doing what we had hoped from them. Not only did they follow the market down; they failed to catch the bounce when it came. A harsh lesson was learned.”
The concept of absolute return funds is that fund managers can make money from shorting the market – that is anticipating that stock or bond markets will fall. They can also go long – that is make money when markets rise.
The flexibility of the funds to mix ‘long’ and ‘short’ investing was one of the main reasons so many absolute returns funds were launched after the market crash of 2008. The problem with bandwagon jumping and new investment products is that that there is no track record to support the heavy marketing.
Martin Bamford, chartered financial planner with Informed Choice, agrees with Merricks that Absolute Return funds, so far at least, have not proved the answer to investors’ prayers.
“I’ve been a critic of this sector and of absolute return funds in general for a very long time. Since they became more popular in the UK, they have consistently failed to deliver on their stated aim.
“More recent periods of market volatility have exposed many of the funds in the Investment Association Targeted Absolute Return sector as unable to deliver on their stated objectives.”
Protection and performance
So why haven’t absolute return products provided decent protection and why such massive differential on performance from funds in the same sector?
Patrick Connolly, at IFA Chase de Vere, provides some insight. “Too many absolute return funds are highly correlated to stock markets, so when markets fall they lose value, not to the same degree but then they don’t capture all of the upside either.