Stocks Section

Absolute Return Funds Are Possibly More Marketing Than Substance

September 2005

We all want more performance for less risk and this is exactly what's promised from a new style of funds called Absolute return Funds (also called Target Return Funds). The marketing suggests that these funds can make money regardless of whether the markets rise or fall, which is a bold statement.

So if this is what everyone wants, why haven't these funds been marketed in the past? Sure, they can now use futures, options and structured products to try and achieve their goals but these tools are hardly new, they've been around for many years.

How Have The Funds Performed?

• The DWS Ratebuster fund launched in March 2005 with a target return of 7.75% has now been closed because it didn't deliver any growth
• Credit Suisse's fund is up 5.2% over the year with returns forecast of 6.25%
• The Insight Target return fund has outperformed though, up 6.2% since February 2005 which is 1.1% better than was targeted

Summary

These types of investments are new therefore the jury is still out. One year or less whether under-performance or over-performance is too little time to draw any sensible conclusions. What we're cautious of is the fact that it's actually very hard indeed to outperform the market or a benchmark index unless you generally take on board more risk. And a reduction of risk is just what the funds managers are promoting so something doesn't sound right.

Yes, the funds can use derivatives and yes they can short markets to hedge and/or make money from falling markets. But who says that these trades will actually make money? It's as easy to lose capital on the short side as it from the long ('short' means you will make money if the market goes lower and 'long' positions will make money from higher prices).

These funds may also be expensive to buy so make sure you do some detailed analysis in this area, and contrast the charges against other investment funds.

See Also

Investing In The Right Sectors Is 9X More important Than Picking a Fund Manager
Why Fund Supermarkets are good news for investors
Discount Fund Providers & Supermarkets
Fund Management Company websites