Absolute return funds: Why all the scepticism?

But while net retail sales of the sector have been steady, there are concerns about how much investors really understand about the sector.

A glance at the IMA Targeted Absolute Return sector shows roughly 70 funds with at least a one-year track record, and just five with at least 10 years of performance. With the sector going back at least a decade, it seems reasonable to assume that it has had enough time to prove itself.

But the Investment Adviser Absolute Return Survey 2014 shows almost 20 per cent of respondents do not believe these funds deliver what they aspire to. In answer to the question: “Do you believe absolute return funds deliver what they set out to?”, some of the comments from advisers ranged from mildly sceptical to positively antagonistic. “No,” said one, “and the facts are that they have failed in the past to produce a positive return.”

Another said: “Most of them are a dangerous substitute for buying the real asset and having your money add to the price of the asset via simple demand and supply.”

Others noted that “all techniques are fallible” and that it can be “dependent on strategy”, but perhaps most worrying were comments that suggested advisers “need to see evidence that they work”. As 35 funds in the sector have at least a five-year track record, it suggests some investors have little confidence in the strategy, in spite of the industry’s best efforts.

The most popular version of an absolute return fund in recent years has been the £21.2bn Standard Life Investments Global Absolute Return Strategies (Gars) fund. This has spawned similar offerings from the likes of Invesco Perpetual and Aviva Investors, from former members of the Gars team.

While many seem to like this vehicle, the reticence towards the sector as a whole could be attributed to a lack of understanding, with terms such as derivatives, shorting, hedging and arbitrage deterring investors. The survey showed that while 48 per cent had a clear understanding of what an absolute return fund offers, 41 per cent found some of the jargon a bit confusing and 2 per cent did not understand them at all.

One person noted: “Yes I do [understand], but they do not deliver”. Another complained that “they can be misleading”.

The survey shows that 67 per cent of respondents use factsheets as their main method of assessing such funds – which makes one person’s comment, that “the factsheets can be very vague in terms of investment strategy”, concerning.

Approximately 57 per cent agreed that there should be more education as some parts of the strategies are “too technical”, with 7 per cent saying they do not understand anything about absolute return at all.

That said, many of the respondents pointed out that if the strategies are too technical investors should not be using them, arguing “it is up to the individuals to ensure they are up to speed”, while others suggested “it is actually the fund managers and the IMA sectors that need the education”.

The IMA has overhauled the sector in the past two years, so it is unlikely further changes will be made in the near future. As with any investment, the key is due diligence and understanding the investment strategy. As one respondent notes: “Some are good, some not so bad, others poor.” The choice is up to you.

Nyree Stewart is features editor at Investment Adviser