Investments and Life Pension Absolute Return Funds Failing to Live up to Expectations

By: MoneyFacts

Absolute return funds may have proved a popular choice for many investors during the recent stock market troubles, but the latest survey from Investment Life & Pensions Moneyfacts has raised concerns whether they have been delivering on their promise to produce positive returns each year.

Falling short

Although the survey found that the average absolute return fund has delivered positive returns in each of the last three years, there are a worrying number of funds that have fallen short of their objectives.  As Table 1 below shows, only 12 of the 20 funds with at least a one year history are in positive territory with regards to their underlying performance over that time, while the number drops to just eight when charges are taken into account.

Of considerable concern, however, will be the extent to which some of the funds have missed their goal. Those entrusting £1K into the worst performing absolute return fund a year ago will have seen their investment slump in value to £746. If the same investment had been made two years ago, it would now be worth just £683.

Table 1: Absolute return fund performance over one year

Source: Lipper Hindsight. Cumulative performance: Figures based on £1K lump sum investment as
at 15 June 2009, total return, UK net, apply initial charges.  Discrete performance: Figures to 15 June, total return,
UK net, no initial charges. Figures in brackets show number of funds available over each term.  

Richard Eagling, Editor of Investment Life & Pensions Moneyfacts, said: “Digging a little deeper, the reason behind the disparity in performance becomes apparent: the approaches that absolute return funds adopt in attempting to achieve their goal vary considerably. Indeed, the majority of funds that reside under the absolute return umbrella have differing benchmarks, risk characteristics and timeframes for delivering performance. Some funds invest only in UK equities, while others are restricted to European equities or maybe global bonds.”

Despite notable disappointments, there are still some encouraging signs for the absolute return sector. The undoubted success story of the sector is the CF Octopus Partner (Absolute Return) fund having posted growth of 51.74%, or a return of £1,442 on a £1K investment made a year earlier, taking into account the impact of charges. It is also the second best performing unit trust/OEIC fund overall over the last 12 months, second only to Neptune’s Japan Opportunities fund.

Also deserving of a mention is the Insight Absolute Currency fund which is ranked 18th in the entire fund universe, returning £1,148 after charges over the last year, and Threadneedle’s Absolute Return Bond which comes in at 23rd with a return of £1,130.

Impressively, 17 of the 20 funds that have been around long enough to have one year performance figures feature in the top quartile of the past year’s best unit trust/OEIC performers. Meanwhile, in terms of the sector overall, an average return of 2.74% (without charges) means absolute return is the third best performing sector of the past year, comparing favourably with an average 15% loss across all funds. Taking into account charges, the average absolute return fund has lost just £4 on an initial £1K investment over that period, while the average fund overall has lost £187 in that time.

Richard Eagling concluded: “With many funds still in their infancy, it is perhaps too early and a little unfair to pass a conclusive judgement on many of the funds. It is also worth bearing in mind is that no investment vehicle can guarantee a positive return. However, given this is the overriding aim of all absolute return funds, that so many have fallen so far short of the mark is somewhat of a surprise. "

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