An absolute return fund that actually delivers
By
Senior Writer
Jody Clarke Jan 15, 2010
Print this article
Absolute return funds claim to offer decent, steady returns no matter what the rest of the market is doing. They were one of 2009's best-selling fund products. But anyone planning to pile in should watch out: the 'absolute return' label masks solid funds and howlers alike.
"If you're looking for some sort of protection, you're better off putting half [your money] in a bank on deposit and half in an index tracker," says Alan Miller of private wealth managers Spencer-Churchill Miller. Absolute-return funds typically charge 20% performance fees, which "is fine if you are some superstar manager". But if you're not, investors end up with "not much at all". Add in dealing costs – not to mention tax and a host of other charges – and your returns are whittled down even further. The firm reckons that on average 33% of a fund's underlying return is lost this way. How?
Excluding the fund with the highest and lowest turnover, the average annual turnover of the absolute-return funds that supply such data is 188%, he estimates. This "staggering" stock churn rate compares to 102% for the average UK equity fund and explains why absolute funds "have performed significantly worse than most other asset categories recently". And despite investor enthusiasm, the last year has been poor. The average absolute return fund is up 11% over 12 months, against a 27% rise for the average fund in the UK All Companies sector, says Morningstar.
However, don't write them all off, says Andrew Wilson, head of investments for the financial adviser Towry Law. "A lot of earlier absolute-return funds were a complete failure." But under an EU regulation called Ucits III, which among other things allows ordinary funds to bet on falling prices by 'shorting', private investors can use absolute-return funds to get access to experienced hedge-fund managers with long-term track records.
He likes Roger Guy, who runs the highly regarded Gartmore AlphaGen Capella hedge fund (tel: 020-7782-2000). Up 96% since 2000 against a 32% return for the FTSE 100 (in US dollar terms), its strategy is now being mirrored by the Gartmore European Absolute Alpha fund. Also managed by Guy, it has returned 12% since launching on 30 Jan 2009.
"If the fund is just a long-only manager having a go, you shouldn't pay up," adds Wilson. Fees are "colossal" and you can buy that much cheaper if you just get an exchange traded fund, says Wilson. "But if you are paying for a hedge fund equivalent, it's worth it."
Published in
Investments
| More
articles
by
Jody Clarke
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.