Just three out of 51 absolute return funds are suitable for private investors, according to research by chartered financial planner Informed Choice. Henderson Credit Alpha, Insight Absolute Insight and IC Top 100 Fund Newton Real Return were the only funds to pass the planner's quantitative screen, which reviews factors such as consistency and cost.
When selecting suitable funds for clients Informed Choice applies a screening process to find funds that demonstrate consistent risk-managed returns with low total expense ratios (TERs). But two-thirds of the funds in the absolute return sector have a TER of 1.6 per cent or above, and a quarter of them have TERs exceeding 2 per cent.
"So far this year, we have seen regular bouts of stock market volatility as fears over the eurozone sovereign debt crisis continue," says Martin Bamford, chartered financial planner at Informed Choice. "Absolute return funds should have been able to profit from these trading conditions, yet they fail to deliver consistent risk-adjusted returns."
Absolute return funds use a variety of strategies in order to target real returns regardless of market conditions. They often appeal to investors during periods of stock market volatility because they are supposed to be able to profit from both falling and rising markets.
"Absolute return funds are regularly criticised for their poor performance and high costs," continues Mr Bamford. "This research demonstrates that criticism is justified for the vast majority of funds in the sector. Absolute return funds have never been a comfortable fit with our investment philosophy, and this research shows that they offer very little that should attract investors. Investors need to think very carefully before including absolute return funds in their portfolios. Failure to perform and high costs make them a less appealing option than a well-constructed and regularly reviewed portfolio of funds."
Informed Choice absolute return research - top 10 scoring funds
| Fund | Informed Choice screening score (%) |
|---|---|
| Henderson Credit Alpha | 92 |
| Insight Absolute Insight | 81 |
| Newton Real Return | 80 |
| Standard Life Investments Global Absolute Return Strategies | 74 |
| CF Odey UK Absolute Return | 71 |
| Threadneedle Credit Opportunities | 67 |
| MFM CPI Defensive Managed | 65 |
| Schroder Absolute Return Bond | 63 |
| SWIP Absolute Return Bond | 60 |
| BlackRock European Absolute Alpha | 59 |
Source: Informed Choice as at 27 July 2012
