The IMA’s conclusion of the Absolute Return Sector Review only serves to justify such an approach.
After more than a year of agonising over it, the best the asset management trade body could come up with was putting the word “targeted” at the front of the sector name and watering down participants’ objectives.
Now each fund house will be allowed to set their own target, with a minimum ‘target’ of positive returns during all market conditions.
In addition the timeframe for achieving the target can also be stipulated by the manager, with a maximum of three years.
All funds being equal
Three years! That is the period of time most funds are expected to make a positive return over, regardless of market conditions, and is the performance metric fund selectors typically use to analyse funds across all sectors. If ‘absolute return’ funds are allowed to take this amount of time to achieve a positive return what is the point in the sector existing at all?
The IMA has defended this accusation, saying it will monitor fund performance and publish data illustrating the consistency with which each fund in the sector has produced positive returns over rolling one-year periods.
This will quite rightly mark out those few managers (Newton Investment Management, Insight Investment and Standard Life Investments) that have established decent track records for investors under the current sector definition. But since it is no longer a condition of staying in the sector too many failing funds will still be allowed to have ‘absolute return’ in the name.
As Adrian Lowcock, senior investment manager at Hargreaves Lansdown, points out, the new name still has the potential to mislead investors.
Mis-selling potential still exists
“The word ‘absolute’ is still likely to suggest to investors that there is some implicit guarantee of positive returns. Adding targeted to the name does not clear this up and it could make things worse, investors may now interpret that funds in this sector are targeting a specific absolute return.”
The IMA has done the minimum it could to try and satisfy FSA concerns that absolute return products have the potential for systemic mis-selling.
Back in October 2012 in the FSA’s quarterly consultation (no.34), it said: “A number of funds currently employ descriptions in their fund name, investment objectives or fund literature that can imply a degree of capital protection or a guarantee of positive returns, where no such guarantee may exist. Descriptions and names of this type include the terms absolute return’ and ‘total return’.”
The FSA went on to say additional disclosures would inform investors that there may be a risk to their capital, provide information on the anticipated timescale for a positive return and advise that there is no guarantee that such a return will be achieved over this or any other timescale (where no such guarantee exists).
These are the limitations the IMA has had to make clear to investors, but as an organisation funded by and run in the interests of asset managers it has done so in a way that still favours fund groups.
Further to go
The IMA’s official line is that this is stage one of its plans for the sector, with stage two the launch of an online fund filter for investors aimed for Q3. The final stage is to continue monitoring the sector and see whether sub-groups might be created to further refine it.
Sub-sectors have been ruled out so far because the IMA does not think there are enough funds with similar strategies to make comparisons meaningful.This seems counter-intuitive though, as keeping funds of such disparate strategies under one sector umbrella is no better.
Dan Kemp, partner at Abermarle Street Partners, says: “Even if it is still too small to have strategy specific sub-sectors, it would have been a good step to have a sub-sector with the target of one-year positive returns and another with a target of three-year positive returns, or even volatility-targeted sub-strategies.”
In the past he has likened the absolute return sector to letting all the animals in the zoo run in the same race.
Apples vs. pears
This is still a fault he finds following the review and says it is ridiculous an equity fund and a bond fund can be contained in the same grouping.
For this reason Kemp does not pay much heed to the sectors: “You are constantly trying to compare apples with pears and that is not the IMA’s fault it is just how things are. But they have had a year to get this right and all they have done is tweak the name and make it easier for failing funds to remain in the grouping and this does not help consumers or advisers.”
The IMA acknowledged its ultimate ideal would be to split the sectors but said this could only happen as and when more absolute return funds are launched.
While it seems a shame to punish all absolute return funds for the failures of many, a better idea might be to scrap the sector altogether.
What do you think of the outcomes of the Absolute Return Sector Review? Let us know below…
