The Investment Management Association (IMA) has renamed the Absolute Return funds sector the Targeted Absolute Return Sector due to concerns that the term 'absolute' could be misleading investors.
The dictionary definition of absolute is "perfect or complete or pure" and it was broadly agreed that these funds should produce a positive return over a defined period, regardless of the market backdrop. However, very few in the sector have met this objective, with mediocre returns compounded by high performance fees with low target thresholds.
However, James Maltin, investment director at Rathbone Investment Management, believes that some of the UK's finest investors actually manage absolute return funds that are not labelled as such or sit in the new Targeted Absolute Return Sector. He recommends:
Troy Trojan (ISIN: GB00B01BP952), a multi-asset fund that aims to achieve capital preservation and growth in real terms over the long-term via an investment strategy that involves neither gearing nor shorting.
Capital Gearing Trust (CGT), an investment trust that aims achieve capital growth in absolute terms through investment in cash, bonds, index-linked securities, equities and commodities.
CF Ruffer Total Return (GB0009684100), a long-only investment fund with no gearing or shorting that aims to achieve positive returns with low volatility from an actively managed portfolio, while maintaining an emphasis on capital preservation.
Meanwhile, the IMA is coming under pressure to overhaul its Sterling Strategic Bond sector as experts warned that some member funds are not strategic at all.
The IMA's definition of the sector makes clear that the manager of a fund in this sector has a "stated intention to retain the right to invest across the sterling fixed-interest credit risk spectrum".
However, Investors Chronicle's sister website www.ftadviser.com has revealed that some funds in the sector are not explicitly aiming to invest across all bond markets. These include the Baillie Gifford Corporate Bond fund (GB0005946669), which does not tend to target government bonds.
Also many high-yield funds have ended up in the strategic peer group but they are not strategic bond funds in the way that some investors assume they are. They are just high-yield funds rather strategic bond funds, often with just a bit of overlay in investment grade.
The IMA says it is reviewing the fixed-income sectors.
Strategic bond funds with a high weighting to high-yield bonds did very well last year, but advisers are now increasingly recommending bond funds with a more defensive cash-plus objective and which have a short or even negative duration. Examples are SWIP Absolute Return Bond Fund (GB00B1265859) or JPM Strategic Bond Fund (GB00B3RJ9K34).
For more tips and information about bond funds, read Select Fixed Income for your Isa with caution.
