Sound Financial Group Blog

The word ‘absolutely’ is one of those that is used with such annoying frequency that it has lost all sense of its true meaning.

In the world of investing, absolute return funds have become the latest fashion accessory and have seen a massive rise in popularity since the dark days of 2008. The marketing arms of the large investment houses informed us that these funds will produce a positive return in any market condition. Whether that’s a positive real rate of return after inflation or not I’m not sure, but following the nervousness of 2008 and 2009 many investors have been wooed by these funds and their perceived benefits.     

The recent Fitch report has warned that investors who have bought an absolute return fund may not realise that their cash is not guaranteed. They also state that “less sophisticated” investors were also at risk of being disappointed with the returns, as absolute return funds focus on protecting investors from the potential downside rather than providing a return akin to or in excess of the ‘market’ (by which I assume them to mean the equities market).

Whether this is the next ‘misselling scandal’ is open to debate, but of course certain sections of the media will attempt to tell us that it may be. If investors have been mis-led into believing that these funds provide the best of both worlds, or indeed that they are in some way ‘guaranteed’ then that is clearly a matter that needs addressing by the regulators and more education of advisers is required.

However, the main issue that we have in respect of these funds (and the reason why we do not recommend them) is that it is impossible for fund managers to get the market timing calls right all of the time and make money when the ‘markets’ are rising and get into the safe haven of cash or bonds when the going gets rough. In simple terms something has to give. As an investor you either miss out on the possible upside in favour of some sort of level of security or you accept that you may lose a proportion of your capital in pursuit of this investment ‘nirvana’.

To rub salt into the investment wound, these funds can also suffer from high charges, performance linked fees and relatively high annual management fees. These are, in our opinion, to be avoided...absolutely! 

If you wish to discuss your own investment planning strategy or would just like a second opinion on your current investment arrangements, please contact us and take advantage of a no cost or obligation meeting.