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Savers warned about risks of absolute return funds
Older investors and pensioners may be putting their savings in jeopardy by investing in supposedly low-risk absolute return funds.
Millions of hard-pressed savers have been advised to invest in targeted absolute return funds, which aim to deliver a higher return than cash, but with less volatility than the stock market.
They are built to offer investors a positive return regardless of what happens to share prices.
They do so by investing in shares, bonds, cash, property andfinancialinstruments such as derivatives to produce a targeted return each year.
Savers seeking capital protection have flooded into these funds, making this one of the most popular investment sectors of all.
However, certified financial planner at Chase de Vere Patrick Connolly says some absolute return funds are sailing too close to the wind.
Out of more than 3,000 funds, three of last years four worst performers were in the targeted absolute return sector with investors suffering big losses, says Connolly: FP Argonaut Absolute Return lost 25.6 per cent,CF Odey Absolute Return lost 17.8 per cent and Old Mutual UK Opportunities lost 11.6 per cent. It is clear these funds are taking too many risks.
Connolly says it is astonishing that funds which aim to offer a positive return year after year can lose so much in such a short period: This is not what investors in this sector would expect.
FP Argonaut Absolute Returns disastrous 2016 performance followed three years of double-digit gains but Connolly says this is also a problem: While an investor might be happy with big gains, if a fund is taking that much risk it could also be liable to significant falls.
He says many pensioners and older people rely on the sector to provide capital protection and funds taking excessive risks should be stripped of absolute return status.
Connolly even suggests the absolute return sector should be scrapped altogether as the dangers are impossible to gauge: It is putting the financial interests of investment companies ahead of investors.
Mike Gordon, technical director at wealth managers Rutherford Wilkinson, says choppy performance shows that funds are failing to keep their promise of delivering returns regardless of what happens to the stock market: The clear disparity in performance highlights the range of strategies used, some of which are complicated and traditionally found only in the hedge fund industry.
Gordon says many funds perform really well in some periods yet miss their target in others: Given these extremes, they are definitely not doing what it says on the tin.
The largest fund in the sector, the huge 25billion Standard Life Global Absolute Return Strategies, fell 2 per cent last year, while the FTSE 100 gave a total return of around 20 per cent or 10 times as much
Gordon explains the struggling behemoth has an enormous array of different and complex strategies and this has hit performance: It makes far more sense to build a balanced, diversified portfolio of cash, bonds and investment funds to match your own attitude to risk.
Peter Griffin, investment director at advisers Gale & Phillipson, says some cautiously managed absolute return funds can be a useful way of reducing risk: We have used the Premier Defensive Growth Fund as a genuine alternative to cash and government bonds.
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