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Time for a rethink

16 February 2004 Staff reporter

Investors who sought refuge in absolute return funds when equity markets were in a tail-spin might usefully consider a rethink, says Dylan Evans, investment director at STANLIB.

The typical absolute return fund is underweight in equities. Over the last three years, it became came a popular choice – understandable at a time of equity weakness.

However, as equities have rebounded, some absolute return funds have failed to keep up.

Investors might not realize it, says Evans, but by locking themselves year after year into an absolute return strategy they may miss the long-term capital growth made possible by a solid equity base.

He sounds the note of caution because retirement fund members helped drive the popularity of these funds. Many were taking short-term shelter from dips in the equity market. In the long-term, they risk stunted capital growth.

He believes absolute return funds work well for retirement scheme members who are close to retirement and wish to reduce investment volatility. For younger members who expect solid capital appreciation in 10 or 20 years, it might be time to reconsider.

Dylan: “Some absolute return funds are tactical asset allocation funds which in 2003 were very underweight in equities. They did well in the first half of 2003 partly as a result of the high interest rates initially available and partly because the bond market did well when rates eased.

“But if these funds do not increase their equity exposure, they could underperform conventional balanced retirement funds over the long term.”

He suggests that investors firmly committed to low risk, should consider absolute return funds, which have a strategic asset allocation benchmark designed to outperform inflation by a set target.

“If a retirement fund member has invested in an absolute return fund with the intention of achieving a specific real rate of return above CPI, all well and good,” notes Evans.

“But if investors chose an absolute return fund simply because it performed well in the first half of 2003 due to fortuitous tactical asset allocation, they should monitor their manager’s strategy in case equity under-investment persists in 2004.”

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