Advisers welcome FSA probe into absolute return sector
Absolute return label may be unfit for purpose, say advisers, as FSA readies sector probe
Advisers have welcomed the FSA’s plans to review absolute return funds and called for co-ordinated action from the regulator, the IMA and advisers on the controversial sector.
The FSA last week confirmed it would be investigating the area in the autumn, as pressure mounts on the popular products.
The regulator has previously warned of potential mis-selling if advisers do not understand the sometimes complex strategies used by some absolute return funds – and the fact that, in spite of their name, positive performance is not guaranteed.
The FSA declined to provide details of areas to be covered by the probe, but advisers welcomed the announcement.
Adrian Lowcock (pictured), senior investment adviser at Bestinvest, said: “I think the concerns are down to the name ‘absolute return’. Are the risks being sufficiently clarified to investors? Something does need to be added.
“People do think of absolute return as a form of guarantee – perhaps the name is no longer fit for purpose.”
Alistair Cunningham, director at Wingate Financial Planning, said: “It is a good idea for the FSA to investigate the sector. I think the IMA needs to look at it closely, and IFAs need to look at their due diligence.
“The massive popularity of the sector suggests some advisers aren’t being careful enough. If it takes the FSA to legislate against that, then so be it.”
Mr Cunningham said liquidity, or the ease of trading in and out of investments, was also a concern in the absolute return sector. In a separate investigation, the FSA is also surveying corporate bond fund managers to assess their funds’ liquidity.
“Complicated strategies are likely to be more illiquid,” Mr Cunningham said. “If a fund suffers heavy losses, people may withdraw their money, leading to more heavy losses, and then we are looking at an Arch Cru-type situation.”
But Brian Dennehy, managing director at IFA Dennehy Weller, questioned the FSA’s basis for launching a review.
“Who are these ‘investors’ who don’t understand?” he said. “How many absolute return funds are purchased direct by these investors – that is, not through advisers?
“Unless they can tell us, we can’t really take yet another review too seriously. More importantly, we are paying for these to be conducted, and they too often fail to quantify the apparent problem.”
In recent years, as the IMA Absolute Return sector has boomed, fewer funds are managing to post positive returns. In 2009, 22 of 23 funds posted a positive return over the year, but over the course of 2011 – a more negative market – just 25 of 64 funds, or 39 per cent, managed the same feat.