Absolute return - too good to be true?
But not all absolute return funds, as they are known, are meeting their promises.
Analysis by Financial Mail shows that the performance of these funds has varied wildly over the past year. Some have delivered on their pledge to beat returns on cash, but others have been hit hard by the turmoil in bond markets caused by the credit crunch.
Some funds, notably UBS’s Absolute Return Bond, have registered double-digit losses in the past 12 months, making a mockery of their ‘absolute return’ billing.
Last week, ahead of the launch of an absolute return fund from investment house Cazenove and similar launches that are in the pipeline, fund scrutineer Standard & Poor’s warned investors to tread carefully.
It said no two absolute return funds were the same and that the risk of widespread misbuying among investors was high.
Absolute return funds are a relatively recent development, made possible by new regulations that give managers of retail investment funds greater freedom.
They can now use complex financial instruments such as derivatives, and alternative asset classes such as commodities and private equity, to protect returns and make money in falling stock markets.
Some industry experts believe there is a pent-up demand for such funds, which aim to deliver returns year in, year out.
Jasper Berens, head of UK sales at JPMorgan Asset Management, says: ‘It’s a fact that 90% of investors benchmark returns against cash, but currently the retail investment industry doesn’t cater well for this need.
‘As an industry, we’re obsessed with relative performance, which means we jump up and down when the funds we manage outperform their peers, even when the result of that outperformance merely means we’ve lost investors slightly less money than our competitors.’
Berens says that what the average investor wants to know is that their nest egg is making money.
‘For most investors, the pain of absolute loss is far greater than the pleasure of absolute gain,’ he says. ‘This means there is little difference in the happiness experienced by an investor who receives market returns of 5% and another who obtains 10%.
‘But the gulf in the degree of disappointment suffered by investors seeing fund values fall by 5% and 15% is huge. If absolute return funds can deliver the returns they say they will, it should lead to happier investors.’
JPM Cautious Total Return is one of the 30-odd funds that are classified by trust analyst trustnet.com as ‘absolute return’. It is also one of the few such trusts to have delivered a positive return for investors over the past year (see box, below), though its one-year return of 3.7% is less than the 5.46% it aimed to achieve (3% over money market rates as defined by one month Libor, the London Interbank Offered Rate).