On the face of it, the changes that came into effect on June 1 were minimal, including changing the name of the sector to the IMA Targeted Absolute Return sector and changing its definition.

It removed the references to a typical 12-month timeframe and instead introduced a minimum requirement that all funds in the sector must target positive returns in any market conditions and they must state a timeframe in which they aim to meet this target but it cannot be longer than three years.

Iain McLeod, multi-asset investment specialist at Standard Life Investments, says: “One of the important changes was the naming of the sector to ‘Targeted’ Absolute Return. No absolute return funds, to my knowledge, had a capital guarantee whereas I think some interpreted absolute return as some form of capital guarantee. Having the word targeted is a step in the right direction and it makes it clearer that these funds are not guaranteed.”

While he suggests it is unlikely any funds will come out of the sector, he welcomed the introduction of the three-year requirement, adding it is “quite reasonable as an investment horizon”.

He adds: “There was obviously the concern that there was a misunderstanding in some areas between what an absolute return fund was actually doing and the perception of what it was doing. This has probably clarified a bit better what absolute return funds should be aiming to do.”

However, while the move to change the name has been welcomed, there is still a cause for concern regarding the diverse range of strategies within the sector.

Martin Bamford, chartered financial planner and managing director of Informed Choice, says: “The IMA overhaul of the sector was a step in the right direction, although the title of the sector still has the potential to mislead investors and it contains too many diverse investment strategies to allow a fair comparison in a single sector.”

James Carver, co-manager of the Scottish Widows Investment Partnership (Swip) Absolute Return Bond fund, notes that while the name change highlights the fact the funds do not offer guarantees, “more important is the clarity required around the timeframe over which absolute return is targeted”.

But he continues: “There may still be issues with this sector due to the wide range of styles/mandates on offer and we believe the sector still requires a lot of due diligence by investors to make sure they get what they want and that a fund does what it says on the tin.

“Over time, however, the approach outlined by the IMA to remove funds from the sector for not fulfilling their objectives may improve the situation.”

The IMA has stated it will keep the sector under review following the changes “with a view to determining whether there should be rules that lead to the exclusion of funds from the sector on historic performance grounds”. But with the changes only just coming into force, it’s unlikely any exclusions will occur in the near future.

Meanwhile the industry association acknowledged the potential problems of the wide range of strategies in the sector, stating: “We will continue to discourage performance comparisons between what remain a very diverse group of funds in the sector. The IMA will ask firms that are classified to the sector for a commitment that they will not make comparisons against the sector as a whole.”

Whether this could potentially be a cause for funds to be reviewed in the future, remains to be seen.

Juan Valenzuela, investment manager at Alliance Trust Investments, says: “Anything that facilitates a better understanding of the investment vehicles is a positive move. Nevertheless the idiosyncratic nature of the funds that are part of the absolute return fund sector has not changed and therefore the investors will have to continue focusing on the underlying investment strategies followed by the different funds, the risk parameters and what to expect from their investments.

“Comparing performance between funds will still not be an easy exercise as different products will focus on different areas of the market and will invest in instruments with significantly different risk profiles.”

As an initial move to address concerns about the sector, the renaming and altered definition have proved to be a sufficient stopgap for now. But with more investors turning to absolute return type strategies in a low growth environment it is more important than ever that investors know what they are getting.

Nyree Stewart is deputy features editor at Investment Adviser

Targeted absolute return: what the IMA said when it reshuffled the sector

Daniel Godfrey, chief executive, IMA:

“One key purpose of the review was to make sure that consumers do not inadvertently perceive there to be some implicit guarantee of positive returns due to the name of the sector. Adding the ‘targeted’ description to the sector name fulfils this purpose.

“A second key purpose was to ensure that consumers can simply and easily find out what individual funds are setting out to do. The clarifications together with the new tools and monitoring that we have announced fulfil that objective.

“We will continue to keep a close eye on the sector to see whether sub-groups could be created to further refine the value of our sector data for users. We will also keep a close eye on performance and, should it become necessary, set performance criteria, which could lead to a fund’s expulsion from the sector on performance grounds. The monitoring we have announced will be an important tool in this regard.

“While the sector classifications help consumers to make informed decisions, it’s important to note that investment choices should not be based solely on this information.”

IMA overhaul: the main conclusions

–All funds in the sector must, at a minimum, target positive returns in any market conditions. They may choose to set more demanding targets. Whatever target they set, it must be specified explicitly

–All funds in the sector must state a timeframe over which they are aiming to meet their specified target. The target may not be longer than three years

–The sector has been renamed ‘Targeted Absolute Return Sector’ to ensure there is no doubt that positive returns are a target and not a guarantee

–IMA to publish data illustrating the consistency with which each fund in the sector has

produced positive returns in rolling, one-year periods

–IMA to create an online filtering tool to help users find and compare funds which share sufficient characteristics to make comparability useful