Action needs to be taken to protect investors from suffering huge losses because absolute return funds are taking on too much risk, advice firm Chase de Vere has warned.
Copious amounts of money has been ploughed into targeted absolute return funds recently as investors hunt for some sort of capital protection to their portfolios.
Absolute return funds aim to deliver a specific level of return in all market conditions with low risk and low volatility.
Targeted absolute return funds appeared four times in the 10 most popular funds of 2016, data from Morningstar revealed.
However, national advice firm Chase de Vere has warned that some absolute return funds are taking too much risk, and are therefore potentially subjecting investors to major and unexpected losses.
If things go wrong, could an adviser look a client in the eye and competently explain why? Dan FarrowAbsolute returns funds have come under fire recently for failing to produce returns for investors, and last year SCM Direct’s Alan Miller suggested they often operate on the “survival of the fattest” in terms of demanding huge fees.
Figures from Chase de Vere indicate that last year, out of 3,071 investment funds, three of the bottom four performers were funds in the targeted absolute return sector.
These include the Argonaut Absolute Return which lost 25.6 per cent, the Odey Absolute Return which lost 17.8 per cent, and Old Mutual UK Opportunities which lost 11.6 per cent.
The performance of these funds is doing absolutely no favours to the investment industry Patrick ConnollyPatrick Connolly, certified financial planner at Chase de Vere, said it was “astonishing” that funds which supposedly aim to provide a so-called absolute return can lose so much.
He also said it was clear these funds are taking too much risk.
“This is not what investors in this sector would expect, and the performance of these funds is doing absolutely no favours to the sector or to the investment industry in general.”
Mr Connolly said the industry needs to look very closely at the classification of targeted absolute return funds and should remove those which take excessive risks.
“It is a sector which is hugely popular with investors and in which they can place a large amount of trust that the funds will provide a reasonable level of capital protection.”
The adviser also questioned whether the ‘absolute return’ title should exist at all.
“Including higher risk funds in this category is putting the financial interests of investment companies ahead of treating their investors in a clear, fair and not misleading way.”
Mr Connolly added: “While an investor might be happy with big gains, if a fund is taking that much risk it could be liable to significant falls in the future.”
Dan Farrow, director of SBN Wealth Management, said: "This raises the question as to how much an adviser should know about the underlying assets or trading strategy of the fund."
He pointed to Standard Life Investment's Global Absolute Returns Strategy (Gars), and questioned whether advisers have any real understanding of how the fund has lost or made money, or why the managers have, for example, gone long Peso, short US Dollars.
"As we have seen from the returns for last year, managers who are supposed to be running an absolute mandate do take big bets and lose, which is why we now shun these funds and use a multi-asset approach."
Mr Farrow said he instead invests in the Pru Fund Growth strategy, adding: "It's long only, but exhibits low volatility and we know to a decent degree what the asset composition is."
He added: "Advisers should ask themselves if things go wrong, could they look a client in the eye and competently explain why?"
Mark Dampier, head of research at Hargreaves Lansdown, said: "I think if there is a problem, it’s that advisers have bought into the absolute return sector as a substitute for what they would have done in bonds.
"It has been the bestselling sector, the irony though is that if investors had kept their allocation to bonds then they would in many cases have done better."
