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How absolutely good are absolute return investment funds?

The world of investment funds is, much like every other aspect of commercial life, driven by marketing departments.  So how truthful are marketing departments being when they claim a fund delivers an “absolute return”?

The term, “absolute return” refers to an objective of a fund manager to target consistently positive investment returns irrespective of the ups and downs of markets. The more absolute a fund is, the less it fluctuates in value.

With profits endowment savings plans were once a very popular form of absolute return investment and, after these fell out of favour with consumers in the 1990’s, marketing departments worked hard to develop a modern equivalent. 

Absolute return investment funds have been marketed for more than two decades which is more than enough time to judge how they have performed.  Today, out of a total of 2,989 investment funds easily accessible by a UK investor, 87 claim to pursue absolute investment return objectives, roughly 3% of the total.

Lets try to deal with this objectively.  I have done this by extracting a list of all absolute return investment funds and then filtered in only those with highly rated investment managers with a performance record of 5 years or longer which has left me with a short list of 9.  Now, lets see how consistently, these top-rated absolute return investment funds produced absolute returns.  And, then compare these against medium grade retail investment funds which make no claims about providing investment returns with minimal downside.

For this, we will use a scatter chart which plots investment volatility against average annual returns over the last 5 years.  First, lets look at the absolute return funds.

Absolute investment funds scatter chart

The most striking point is there appears to be a high degree of consistency in the average annual performance of 3.23% per annum but almost no evidence of controlling investment risk.

Now, lets look at a selection of medium quality mixed investment funds from extremely well recognised retail investment brands.

Mixed investment funds scatter chart

Here, we see a wide range of average annual performance and, as one would hope and expect, medium term returns tending to increase with increased risk.

We can conclude from this evidence that, with possibly one or two exceptions, the absolute return investment fund range currently on offer does not do very well at delivering on the promise of consistent risk controlled absolute investment returns.

Posted in Financial, Investments