Chase de Vere, the UK firm of independent financial advisers, has called for action to protect investors from what it calls the “danger of high risk” Absolute Return funds.
Funds within the Investment Association’s Targeted Absolute Return sector are very popular with investors particularly at a time when stock markets are at record highs and many fixed interest assets look expensive, says Patrick Connolly, investment specialist at Chase de Vere.
“It is astonishing that funds which supposedly aim to provide a positive absolute return can lose so much,” says Connolly. “This is not what investors in this sector would expect and the performance of these funds is doing absolutely no favours to the sector as a whole or to the investment industry in general.
“The industry needs to look very closely at the classification of Targeted Absolute Return funds. It is a sector which is hugely popular with investors and in which they can place a large amount of trust that the funds will provide a reasonable level of capital protection.
“Funds which take excessive risks should be removed from the Absolute Return sector and reclassified elsewhere, such as in the Unclassified sector,” he says
In 2016, out of 3,071 investment funds, three of the bottom four performers were from the Targeted Absolute Return sector. FP Argonaut Absolute Return lost 25.6%, CF Odey Absolute Return lost 17.8% and Old Mutual UK Opportunities lost 11.6%.
‘Too much risk’
“It is clear that these funds are taking too much risk,” said Connolly. “This is a sentiment which is also likely to apply to funds which make sizeable gains. While an investor might be happy with big gains, if a fund is taking that much risk it could be liable to significant falls in the future. It should be noted that FP Argonaut Absolute Return made gains of 39.6%, 13.6% and 11.9% in the years preceding its 25.6% loss in 2016.
Connolly believes that there is a question mark over whether a sector with ‘Absolute Return’ in the title should exist at all.
‘Higher risk funds’
“If it does then by including higher risk funds the investment industry is putting the financial interests of investment companies ahead of treating their investors in a clear, fair and not misleading way,” he said.
Chase de Vere is a firm of independent financial and corporate advisers with 13 offices across the UK, backed by Swiss Life.