InvestmentsJun 24 2013

Investment insight: Absolute return funds

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The absolute return label has historically been called misleading and misunderstood. The Investment Management Association (IMA) this year announced it was to review, rename and redefine the sector. The changes were first announced in May 2011 but were subsequently delayed numerous times

What the IMA said

Daniel Godfrey, chief executive, IMA: “One key purpose of the Absolute Return sector 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 today 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 today 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. Investors should ensure they fully understand what a fund sets out to do and seek financial advice if necessary.”

Five questions to ask

1. What timeframe is the fund using? Since the sector has been redefined, funds can now choose a timeframe in which they must meet their objectives. This can be no longer than three years.

2. In which asset class does the focus lie? Each absolute return fund differs, in that it may be led by equity, fixed income or any other alternative investment. It can be a range of all; some favour a more multi-asset approach.

3. What is the fund’s strategy? Many absolute return funds have different strategies – it is important to look at where it is allocating to and how.

4. What sectors or market cap does the fund invest in? It may not be clear from the outset what sectors or cap the fund invests in. Take a look at the factsheet to get some more information. Some favour a small-cap approach and invest in cyclical sectors.

5. Do you understand the jargon? One problem the industry had with absolute return funds is the objectives were not clear. Check your clients understand what they are investing in.