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By Nick Reeve | Published Jun 01, 2012

IMA outlines three options for Absolute Return sector

The IMA has proposed three options to member firms to overhaul its Absolute Return fund sector, Investment Adviser can reveal.

Two of the options would see the 78-fund sector split up to differentiate funds based on either their performance targets or their investment strategies.

The third option would include introducing an online tool to allow investors and advisers to filter the sector themselves according to a range of criteria.

The IMA first initiated this review into the sector in May 2011, following criticism that its constituent funds are too varied to be compared with each other. The review also came amid warnings that absolute return funds could be mis-sold to investors who might think that positive returns were guaranteed.

IMA director of markets Jane Lowe said the final sector consultation was aimed at ensuring the sectors are “future-proof”.

“The challenge with this review is that the principle of grouping funds together remains, but there is not such a simple answer as with other sectors,” she said.

Ms Lowe said the option of an online tool reflected the difficulty in splitting the sector by the IMA’s conventional standards, adding it would “leave scope for the investor to choose” based on criteria such as volatility, strategy or benchmark.

“People are becoming more concerned about the impact of inflation on their savings so they are more interested in outcome-based funds rather than benchmark-based. We could end up with hundreds of funds [in this sector],” she said.

This proposal would involve the Absolute Return sector being renamed, with proposed new names including ‘Target Funds’, ‘Hedge Funds’ and ‘Alternatives’.

The benchmark-based proposal would split funds into two sub-sectors, with one containing the roughly 40 funds that use cash-like benchmarks such as Libor. This sub-sector would allow funds to be compared in terms of performance for the first time, as well as being monitored by Morningstar. Funds which miss their cash target by more than 2 percentage points for two consecutive years would face removal from the sector.

Funds not using a cash-like benchmark would be housed in an “unrestricted” absolute return sector and would not be compared by performance, as is the case with the existing sector.

Both new sub-sectors would still require funds to aim to post a positive return over a rolling 12-month period.

IMA members have until July 3 to respond to the consultation.

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