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As investors flood into Absolute Return funds – are these low risk funds everyones suddenly buying as safe as they seem?
Published:00:10 BST, 5 August 2015Updated:10:38 BST, 5 August 2015
If you go to a financial adviser and say you dont like taking risks with your money, theres one type of fund likely to be recommended.
Huge numbers of cautious investors are being put into Absolute Return funds an investment that tries to beat the amount of interest you can get in a cash savings account without taking risks with your money.
Almost half a billion pounds flooded in to these investments in June, making them an unlikely best-seller.
All your eggs in one basket? Huge numbers of cautious investors are being put into Absolute Return funds an investment that tries to beat the amount of interest you can get in a cash savings account without taking risks with your money
It follows 529million they attracted during April and 317million in May.
Because Absolute Return funds are barely known to ordinary investors, experts think financial advisers are driving the vast sums in to them.
And the new pension freedoms are thought to be a major reason for their popularity as advisers look for low-risk investments for retirees.
But if you scratch the surface, youll find these funds are incredibly complicated and use sophisticated investment tools youd normally expect to find in a hedge fund.
Absolute Return funds are designed to produce constant returns whether the stock market rises or falls.
Some have made huge returns in the past five years, making them seem very attractive. But this is not what they are supposed to do.
And they have only been tested in a rising market so no one knows if the formula will still work if share prices start to fall. Huge rises can often lead to huge dips.
The Standard Life Global Absolute Return fund is home to an incredible 25billion of savers cash. But in a sign it may not be able to perform if the stock market takes a tumble, it lost 1.5 per cent between March and June as the FTSE All Share dipped.
Brian Dennehy, Fund Expert director, says: The irony of lower-risk funds is that you would think they would be simple to understand, but they are fiendishly confusing.
It may seem contrary to normal logic, but just because an Absolute Return fund has gone up massively it doesnt mean it is doing its job.
That means funds, such as Odey Absolute Return which made dazzling returns of 80 pc plus, may not be quite as good as they seem.
Quite often Absolute Return funds use derivatives. This is when fund managers effectively make bets on what the market will do so they could, for instance, gamble that stocks will fall by an amount and then, if theyre right and it does, they win and make money.
But derivatives are complex, risky investments that are most commonly associated with hedge funds. They are not a product the typical low-risk investor should be putting their money into.
Unpredictable growth: Many Absolute Return funds are incredibly volatile, by their very nature. Data produced for Money Mail by ratings agency Fund Calibre shows the extent of this unpredictability
And many Absolute Return funds are incredibly volatile, by their very nature. Data produced for Money Mail by ratings agency Fund Calibre shows the extent of this unpredictability.
The Cartesian UK Absolute Alpha fund grew by 10 per cent in the 12 months to August 2014. But lost 5 per cent in the 12 months to February 2015.
The Eclectica Absolute Macro fund was down by 10 per cent in the year to May 2014, but went on to return a massive 26 per cent in the year to March 2015.
And the Schroder Absolute UK Dynamic returned 20 per cent in the year to January 2014, but a year later had lost 11 per cent.
What makes life even harder for savers is that there are 65 of these funds, each with a different strategy and target, making comparison impossible.
So why would you pick an Absolute Return fund?
When they do what they are supposed to do, they offer a steady return, regardless of how the stock market performs.
They can beat a savings account and should never over or under-achieve. And, as long as you know they use risky products to meet targets, theres nothing wrong with them.
In fact, of the 33 funds that have been running for five years, 18 have delivered returns they promised at least 85 per cent of the time. And ten of these have delivered 90 per cent of the time.
The point is these funds are not supposed to produce stellar returns or grow your money by 20 per cent each year.
They are supposed to grow your money by about 3 per cent annually.
If they are shooting the lights out, theyre not fitting their remit. And if they have had a big peak, it may well soon be followed by a huge trough.
Mr Dennehy likes the Kames UK Equity Absolute Return fund. It has returned 16.4 per cent over the past three years.
Darius McDermott, director at Fund Calibre, says: If you look for those continually growing your money more than it would in a cash account, with less volatility than youd get investing in the stock market, you can find some good funds that have achieved exactly what they set out to do.
Is it safe? The Eclectica Absolute Macro fund was down by 10 per cent in the year to May 2014, but went on to return a massive 26 per cent in the year to March 2015
Compare the best investing platform for you
Are low risk Absolute Return funds as safe as they seem?
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The investment industrys world of abbreviations…
Accumulation – any income generated by the fund like dividends or interest is automatically reinvested.
Income – any income generated is distributed by the fund instead of being reinvested.
Distribution – any income generated is distributed by the fund instead of being reinvested.
Retail – the fund is aimed at ordinary investors.
Institutional – the fund is aimed at corporate investors like pension funds.
Different fund houses use letters for different things. Check with them what they stand for.
Some fund houses use this name on clean funds which carry no commissions for financial advisers, supermarkets or brokers, just the fee levied by the fund manager. But other fund houses use different letters – I, D or Y, for example – so you need to find out for yourself which are clean funds.
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