Absolute return funds: it's a safe bet
It may seem like an investor's dream, but absolute return funds claim to make money even when share prices drop. Charlie Weston takes a look at the new fund about to revolutionise investing
Market turmoil: Equities' prices tanked last year leaving many people reluctant to invest in traditional investment funds.
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IT sounds too good to be true -- but you can now buy a new type of investment fund that it is claimed will make money even if share values fall.
Some investment experts go so far as to claim that these new absolute return funds are set to revolutionise investing.
It's not hard to see why. These products, which have only become generally available in the past couple of years, aim to make money for investors in both rising and falling markets.
So with shares jumping up and down like children who have eaten too many Smarties, there is certainly something attractive about a product that claims it will give you a return of 7pc or more a year rather than a rollercoaster ride.
So what exactly are absolute return funds and how do they differ from ordinary investment funds?
Traditional investment funds aim to outperform the stock market. So they are "relative return funds" because they aim to do better than the average return for the market.
The manager of a traditional managed fund will try to buy assets or shares that will perform over the long term. But it is of little use if your managed fund beats the market by 5pc if the market has fallen by 5pc.
In contrast, an absolute return fund aims to generate a positive return in either a rising or falling stock-market cycle. It does this by using a range of complicated investment strategies that will make a profit from both the ups and downs in markets and stock prices.
An absolute return fund will invest in a wide range of assets, including not only shares, bonds and cash, but also the likes of property and hedge funds. It can also mean using derivatives, which are specialised products that allow investors to bet on the future price movement of an asset. Crucially, this allows investors to make money when an asset is falling, as well as rising, in price.
Take the Standard Life Global Absolute Return Strategies Fund, which was put together by experts in the Edinburgh-headquartered company in an attempt to dig the employees' defined benefit pension scheme out of a hole.
In the last few months when global stock markets experienced one of their worst performances since the Great Depression, the Standard Life fund fell 3pc, according to Tam McVie of Standard Life.
The recovery in markets in the past few months has seen the fund rise 6.6pc in the past year, and 7.1pc a year since it was launched in 2005.
The fund aims to have a return which is equivalent to the return on cash over six months (which is just over 1.1pc) plus 5pc.
Mr McVie says that the complex strategy behind the fund involves not only investing in shares in countries like Brazil, but also taking bets that sterling will rise against the euro and betting that inflation will rise in the UK.
The level of complexity of an absolute returns fund means investing in one is strictly for a sophisticated investor and those thinking of pumping money into one would be well advised to obtain independent financial advice.
Additionally, anyone investing in an absolute return needs to understand what "short" investment means. A short investment is created by borrowing and selling a stock or asset that the fund does not actually own, with the intention of buying it later at a lower price before returning it to its owner.
Financial adviser Karl Deeter of Irish Mortgage Brokers describes absolute return funds as "hedge funds for small investors". He acknowledges that the record of these funds has been good up to now, but he says that future returns are not guaranteed.
Financial adviser Gary Connolly of independent advisory firm Citadel in Dublin said absolute return funds strive to deliver returns irrespective of the market environment.
There are usually around 30 different investment strategies behind an absolute returns fund, and very few people would understand what the managers do to achieve their returns.
Asked if these funds were suitable for retail investors, as opposed to pension funds and high-net-worth individuals, he recommended that small investors should, at most, put 15pc of their investment portfolio into such funds.
Also worth noting is that the performance of an absolute return fund will lag behind the performance of stock markets if equities are steaming ahead, according to Hiberian Aviva's Michael Gordon.
cweston@independent.ie
