The future of absolute return looks rosy

Indeed, the latest IMA Annual Survey suggests that absolute return funds are becoming more mainstream.

The report reveals that targeted absolute return funds increased their share of industry funds under management in 2013 and by the end of the year made up 4.5 per cent, compared with 4 per cent in 2012.

Net retail sales were “strong throughout the year”, particularly after the first quarter of 2013.

Total net retail sales for the sector reached £2.9bn, up from £976m the previous year, while funds under management rose to £41bn, up 33 per cent on the end of 2012.

The IMA notes: “While we remain in a low interest rate environment, investor demand for return-based or outcome-oriented products may continue. Renewed vigour in the equity market does not seem to have dampened investor appetite for targeted absolute return funds, which intuitively may appeal to investors in times of market volatility.”

The Investment Adviser Absolute Return Survey 2014 asked advisers whether outcome-oriented solutions will become more or less important over the next few years. Of the 162 respondents, 105 – 64.81 per cent – said: “Yes, a lot more”. Only 1.85 per cent think these types of outcomes-based solutions will become less important and 27.16 per cent foresee no change.

The RDR and pensions reforms seem to be the main factors driving the increasing emphasis on investing in outcomes. But for some, absolute return funds remain a controversial option.

Martin Bamford, chartered financial planner and managing director of Informed Choice, says they are “great in theory” but often less successful in practice.

“Few have consistently delivered absolute returns, net of inflation and charges, since the sector was launched in the UK,” he claims. “Those that have succeeded tend to use hedge fund strategies which create risks beyond the acceptance of many retail investors, often combined with expensive charges including performance-related fees as high as 20 per cent.

“The sector is an absolute minefield for investors, with returns varying wildly and limited chances of backing a winner.”

In spite of such reservations, IMA sales figures point to a growing market. In its annual survey, the IMA points out that since the launch of the Absolute Return sector (now the Targeted Absolute Return sector) in 2008, it has been unclear whether their popularity was cyclical or “part of a wider structural evolution within the industry”.

It adds: “The relationship between targeted absolute return funds and other products will become clearer in the coming years. However, we have reported in recent years that many within the asset management industry believe the shift is structural.”

The future of the absolute return fund sector looks rosy for now. So advisers and investors may want to consider whether these funds have a place in a long-term investment portfolio.

Ellie Duncan is deputy features editor at Investment Adviser