Absolute bond fund pricing a 'shambles', study shows

Absolute bond fund pricing a 'shambles', study shows

Pricing in the flexible and absolute return bond space is a "shambles" according to a new report, which found no clear rationale behind fee models in the sector.

The report from consultancy bfinance said that newer fixed income strategies had no coherent pricing policy, suggesting investors could risk being overcharged.

The firm studied unconstrained and absolute return fixed income funds and found investors had no gauge for appropriate pricing levels, given most strategies had been launched in the last six years.

The report said: "This [unconstrained] style of [bond fund] has become increasingly popular while traditional fixed income returns have remained low. Mandates for 'unconstrained' or 'absolute return' fixed income have surged in recent years, provoking a wave of product launches. Yet the sector is a pricing shambles.

"There is virtually no relationship between fees and the amount of tracking error, either targeted or realised. There is no correlation between fees and volatility."

The report also found that while fees for institutional clients had fallen in traditional asset classes, overall charges had risen, given fund firms were launching more expensive and more complex products.

The firm added that from a risk perspective there was no significant correlation to price, and no link between the amount of credit in a portfolio.

"We also could not identify any patterns linking pricing with particular factor exposures," the report said.

According to the research, the average institutional fee for an unconstrained or absolute return bond fund was around 0.48 per cent - considerably higher than that paid for a standard index-aware global bond strategy.

Fee dispersion appeared high in the unconstrained and absolute return bond fund space, with 0.19 percentage points between the upper and lower quartiles. This compared with ranges of 0.09 and 0.1 per cent for investment grade and high yield respectively.

The report suggested managers could be maximising the opportunity to launch more expensive products using a "relatively opaque alpha-generation process and little previous fee level discovery".

The findings come after Morningstar published a report criticising unconstrained and absolute return bond funds, suggesting they had “struggled to deliver” on their “contradictory” promises.

Morningstar’s fixed income research team said investors using the products risked disappointment, particularly when they used the portfolios as replacements for conventional fixed income strategies.