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Home > Investments > Alternative Investments

By Jenny Lowe | Published Sep 03, 2012

Absolute return scrutiny continues

The IMA’s controversial Absolute Return sector has been under the spotlight for a significant period, particularly since the global financial crisis caused chaos in the markets in 2007 and 2008.

The IMA’s announcement in June that it was, once again, conducting a consultation into the sector and, more recently, the FSA’s plan to investigate the area in the autumn did not surprise anyone in the investment industry.

A report by the FSA reported that 51 per cent of absolute return funds failed to make a positive return in 2011. A further 33 per cent failed to beat inflation and a report from IFA firm Informed Choice discovered only three funds in the sector scored above their

80 per cent minimum threshold for fund suitability. Consumer group Which? slammed absolute return funds earlier this year, listing them alongside 12 other “unlucky financial products”.

According to Informed Choice’s research, the three funds to receive acceptable quantitative scores were Henderson Credit Alpha, Insight Absolute Insight and Newton Real Return, representing less than 6 per cent of the total number of funds in the sector. Sixty-seven per cent of funds in the Absolute Return sector received a score of less than half the maximum possible, when factors including consistency and cost were reviewed, the report shows.

Martin Bamford, chartered financial planner at Informed Choice, says: “Absolute return funds are regularly criticised for their poor performance and high costs. This research demonstrates that criticism is justified for the vast majority of funds in the sector.

Selection process

“Our fund selection process seeks to identify funds that demonstrate consistent risk managed returns combined with low total expense ratios. Absolute return funds have never been a comfortable fit with our investment philosophy at Informed Choice, and this research shows that they offer very little that should attract investors.”

In spite of ongoing queries over the sector, eight new funds launched into it in 2011 and a further three so far this year, including the Ignis Absolute Return Credit fund just this summer.

Managed by Ignis’s head of credit, Chris Bowie, the fund is made up of the manager’s best ideas and targets a low volatility level of 2-6 per cent, zero duration and zero interest rate risk, as well as aiming for a low correlation to other asset classes.

Claiming it to be a “new breed of absolute return fund”, Mr Bowie adds “[the fund] should eliminate investor concerns with the potential to provide consistent, positive returns regardless of market direction. By investing in highly liquid credit default swaps (CDS), the fund will not be impacted by decreasing levels of liquidity in the cash corporate bond market. I and members of the Ignis credit team have personally invested in the fund.”

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