Take 5: Investing in absolute return funds
Many absolute return funds may be lumped together in one sector, but they are not all the same. Here are five top tips on using them
The idea of a return regardless of market circumstances is appealing, but not all absolute return funds actually deliver on this promise. Clue up on the best way to use them with MM’s guide.
1. Check the fund’s time horizon. To be in the IMA Absolute Return sector, funds must aim to produce a positive return over a 12-month period. But some funds say in their literature that their strategy better suits a longer investment term. While this does not excuse poor performance, it may affect suitability for your client.
2. Analyse the absolute return fund type. Some focus purely on bonds whereas some produce an equity-like performance. Inclusion in the IMA sector is purely based on the desired outcome and has no asset allocation restrictions, meaning many funds look very different under the bonnet.
3. Choose a manager you’re confident in. Absolute return funds use a wide range of strategies and instruments to achieve their aim, which can include derivatives. A manager with experience in this area will be able to employ different strategies dependent on market conditions.
4. Beware of upcoming changes. The FSA is keeping an eye on absolute return funds and the IMA is reviewing the sector. Results are yet to be announced but the sector may be split up further, as detailed in Money Management's report on absolute return funds.
5. Compare performance to a suitable benchmark. Assessing fund performance compared to the sector average is almost meaningless since completely different investment strategies are used. Similarly, no single index can be used as a benchmark for the whole sector. Look at benchmarks most similar to the fund’s composition to see if it is performing well.
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