Inflation challenges absolute return funds
More than half of UK absolute return funds fail to beat inflation
More than half of absolute return funds fail to beat inflation, according to data from FE Analytics, based on a universe of UK funds.
An analysis of 69 funds in the IMA Absolute Return sector in the 12 months to 30 June 2011 found that just 43% beat inflation to deliver positive returns in real terms.
FE data shows that 24 funds outperformed both RPI (retail price index) and CPI (consumer price index); three funds beat CPI, which was 4.2% in June, but failed to match RPI at 5.0%.
Also, 18 funds delivered positive returns but underperformed CPI, meaning investors would have lost money in real terms; 11 funds ended the 12-month period in negative territory; and 13 funds were launched within the past year, said FE Analytics.
Of those 56 funds with a 12-month track record, 42.9% beat inflation as defined by both RPI and CPI. However, 51.8% of funds would have lost money in real terms.
These performance figures do not account for fees, said FE. “In reality a higher percentage of funds would have failed to keep up with inflation once costs were taken into account.”
The best performing funds over the year were: the CF Odey UK Absolute Return Fund, up 38.72%; the GLG Emerging Markets Equity Ucits III Fund, up 29.79%; and the Cazenove Absolute UK Dynamic Fund, up 28.95%.
At group level, L&G Investment Management had the best track record with all three of its absolute return funds comfortably ahead of inflation, said FE Analytics. The L&G Diversified Absolute Return Trust generated 17.98%; the L&G European Absolute Fund delivered 13.49%; while the L&G UK Absolute Fund rose 8.29%.
Michael Holland, managing director of FE, said: “While absolute return funds endeavour to deliver positive returns, they have never promised to beat inflation. However, inflation is something investors must bear in mind if they want to preserve their capital and grow their wealth in real terms.”
The funds industry has not been able to agree on a definition of an absolute return fund. Some say that all funds with long and short positions should be included, while others, such as Lipper, say absolute return funds are those that aim to beat a benchmark by a fixed amount.
The Investment Management Association in the UK defines an absolute return fund as being managed on a rolling 12-month time period with a 0% or above return ‘in any market conditions’.
Since January 2009, based on Lipper’s definition, the European absolute return fund market has grown by 80% to €140bn in assets under management in March 2011, says Fitch Ratings.
But such strong growth has set off alarm bells. Fitch has suggested the sector is being driven by sales rather than performance, raising the risk of mis-selling as they become popular with retail investors.
The UK’s Financial Services Authority has already advised investment firms not to launch funds using the ‘absolute return’ description.
Earlier this year, the IMA admitted that the IMA Absolute Return sector may change as part of its annual review into sector classifications.