How is it that a sector so few people understand – so much so that a few years ago it had to be reclassified – is now suddenly attracting half a billion pounds a month?
That is what I asked myself when I looked at the amount currently pouring into Targeted Absolute Return funds.
This certainly cannot be driven by ordinary retail investors – I cannot imagine any DIY saver logging on to a platform and deciding to pick one of these out. Look at the top ten selling funds for pension investors at Hargreaves Lansdown and you will not find any Absolute Return funds on there.
Instead it seems to be driven by worried advisers looking for a safe place for their clients’ cash.
Bond funds used to be the go-to low-risk option, but with valuations off the scale and an interest rate rise on the horizon, investors are dumping these funds in their droves.
So have Targeted Absolute Return funds become the new proxy for safety? Is it that they are now the go-to option for anyone who wants to take drawdown from his pension?
I hope not.
These are fiendishly complicated funds. They use instruments and techniques more often seen in the structured products and hedge funds which have lost savers’ cash time and time again.
And you cannot compare them. In a 34-strong sector, some funds are trying to grow you cash on a three-year rolling basis, some 12-monthly, some by 3 per cent, some by 5 per cent; some are global, some are UK-only, and many are employing complicated long/short strategies that would flummox even an experienced investor.
Some of the data looks incredibly compelling – CF Odey Absolute Return has returned almost 80 per cent over three years. You would be hard-pressed to convince anyone who invested in this fund that actually it had not done its job.
But Absolute Return funds are not supposed to produce returns like this. And if they go beyond their remit when the market goes up, how can investors have any confidence that they won’t do the same when the market goes down?
Absolute Return funds are not supposed to produce returns like thisSome are a bit more concerning. The Cartesian UK Absolute Alpha fund grew by 10 per cent in the 12 months to August 2014 – but lost 5 per cent in the 12 months to February 2015.
The Eclectica Absolute Macro fund was down by 10 per cent in the year to May 2014, but returned a massive 26 per cent in the year to March 2015.
And the Schroder Absolute UK Dynamic returned 20 per cent in the year to January 2014, but a year later had lost 11 per cent.
All this hardly seems to meet the criteria of delivering a constant, steady return.
The fact is that most of these funds are just five years old or younger, and so have only been tested in a bull market.
In the stock market conditions of the past five years, for most asset classes, it has actually been pretty difficult to lose money.
We do not know how these strategies will fare when the tide turns. But you can guarantee that savers will come asking questions when the fund that netted them 10 per cent a year over the past five years is suddenly struggling to keep pace with cash.
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Trouble ahead
I am convinced that we are reaching crunch-time for the first-time buyer market. I feel the same way as I did in 2007 when the data just did not stack up. We cannot have those at the bottom of the market getting older and richer, and still borrowing increasing amounts. At some point the market will crack.
One glaring indicator that all is not well is the information from the Halifax on the price of homes being sold under government schemes designed to help first-time buyers.
The national average is £189,786, and in London it is £323,148.
You just cannot have first-time buyers using affordable housing schemes paying more for their homes than the average buyer – for starters, it would obviate the word “affordable”. The government housing schemes are a sticking plaster to the real problem – the supply of homes.
It needs fixing now – otherwise the whole market will fall apart from the bottom up.
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Spend it wisely
While the regulator and the Treasury seem to spend their time dithering about the impact of the pension reforms, investment companies continue to produce some fascinating data on how pensioners are spending their money.
The latest data, from Fidelity, shows that rather than splashing their cash on cruises and Lamborghinis, many are concentrating on more practical matters.
Around one in three are using their cash to pay down debt, and about one in ten are doing home improvements.
Just 5 per cent take holidays and 3 per cent buy cars – as you might expect under normal circumstances.
Interestingly, 2 per cent seem to be funding divorces, reflecting the increasing number of over-50s separating, and it looks as if cashing in their pensions early is the only way to fund this expensive business.
It just goes to show that ‘stay married’ remains one of the best bits of financial advice you can give.
James Coney is Money Mail editor at the Daily Mail
