Absolute Return Funds
Absolute return funds seek to deliver positive returns for investors over the medium term, regardless of market conditions. Absolute return funds have a set positive target return to achieve over the medium term and have a lower volatility/risk rating than traditional managed funds. Is this type of fund the Holy Grail for investors?
A New Investment Approach
Most traditional managed investment funds provide a return when the asset price in which the fund is invested increases. This has been clearly demonstrated through the financial crisis of 2008. Many investors ask why did the fund manager not move into cash when they knew markets were turning negative? The reason is that the vast majority of managed funds have an investment mandate, which places maximum and minimum exposure limits to equities. So even if the fund manager felt the right investment strategy was to reduce equity exposure, they can only reduce the exposure to the minimum level stated in the fund mandate.
Most fund managers are managing their funds to provide relative returns. This means the fund manager is benchmarked against peer funds on the market. For example; Fund A decreases by -10% in one year, the next best fund in that segment Fund B produces a one year return of -15% and the average of all funds in that segment is -20%. The manager of fund A is deemed to have had a successful year and indeed the manager of Fund B is also deemed to have had a successful year, as they both outperformed the average performance of their peers.
But we know that a negative return is not what investors measure to be a successful year, investors want a return not a loss.
In contrast to traditional fund management, the managers of absolute return funds have fairly wide powers when it comes to developing investment strategies and deciding on equity exposure. These fund managers are not benchmarked against their peers, but against the target return set in the fund prospectus.
Investors can access this type of fund through a single premium investment, through a regular savings plan, through their private pension arrangement or through their post retirement pension account (ARF/AMRF).