In highlighting the growing trend of launches and inflows into Ucits absolute return products, ratings agency Fitch comments such vehicles have the potential to disappoint less sophisticated or informed investors.
The report reads: “The objective of consistently achieving positive returns may prove to be misleading if it is not clearly stated returns are not guaranteed and they are not cash proxies. Realistically, fund investors should expect an AR fund may suffer occasional losses in the short term, but that it will deliver positive, better risk‐adjusted returns than relative return (ie benchmarked) funds over the medium and long term (eg one year).”
The lack of a standardised definition could also lead to style drift in some AR portfolios as they strive to compete with high performing, relative strategies. Even though AR funds, by their very nature, will tend to underperform in a bull market, some managers may feel pressured by this lag and seek higher risk strategies, Fitch asserts.
Without clear standards, some funds marketed as ARs may deliver an unacceptable level of volatility in less benign markets, it says. “Investors need access to clear, transparent information on their AR funds in order to manage expectations.”
The European absolute return (AR) fund market has grown by 80% since January 2009, reaching €140bn in assets under management by March 2011. Growth has largely been driven by accelerating sales, which according to Lipper, amounted to €22.9bn in 2010, a 60% rise over the previous year.
The Fitch report comes out just a week ahead of when submissions are due in at the IMA on ways to possibly redefine its AR classification. The ratings agency also comments on this in its review, noting it is in favour of refining the categorisation of absolute return funds, based on achievable, specific and timely risk and return objectives.
