A new piece of research carried out by Informed Choice, the award-winning firm of Chartered Financial Planners, has revealed the lack of suitable funds for investors to consider in the IMA Absolute Return sector.
Informed Choice reviewed all 51 funds in the sector by applying its unique quantitative screening model, discovering that only three funds scored above their 80% minimum threshold for fund suitability.
Henderson Credit Alpha (92%), Insight Absolute Insight (81%) and Newton Real Return (80%) were the three funds to receive acceptable quantitative scores, representing less than 6% of the total number of funds in the sector.
The majority (67%) of funds in the Absolute Return sector received a score of less than half the maximum possible, when factors including consistency and cost were reviewed.
Informed Choice chartered financial planner Martin Bamford commented:
“Absolute return funds are regularly criticised for their poor performance and high costs. This research demonstrates that criticism is justified for the vast majority of funds in the sector.
“Our fund selection process seeks to identify funds that demonstrate consistent risk managed returns combined with low total expense ratios. Absolute return funds have never been a comfortable fit with our investment philosophy at Informed Choice, and this research shows that they offer very little that should attract investors.”
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, in the belief that they can profit from falling or rising markets.
Bamford continued:
“So far this year we have seen regular bouts of stock market volatility as fears over the eurozone sovereign debt crisis continue. Absolute return funds should have been able to profit from these trading conditions, yet they fail to deliver consistent risk adjusted returns.
“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 suitable funds.”
The study revealed that two-thirds of the funds in the Absolute Return sector have a Total Expense Ratio (TER) of 1.6% or above. A quarter of the funds have TERs exceeding 2% per annum.
From 31st December 2012, financial advisers will need to consider the whole range of retail investment products in order to remain independent. This independent status will be unaffected if they choose not to recommend certain investment products because they determine they are unsuitable for their clients.
Bamford commented:
“Independence is important to ensure investors get the best advice once the Retail Distribution Review is implemented. What independence should never mean is that unsuitable investment funds are recommended simply to prove the whole range of retail investment products is being used.”
Informed Choice regularly reviews the entire universe of funds and applies its research criteria to identify those funds most likely to deliver consistent performance.
The quantitative screening process is used to identify funds with suitable attributes, before further qualitative research is conducted to finalise recommendations.
News Release: New Research Highlights Lack of Suitable Absolute Return Funds
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