Category Retirement
SUB CATEGORIES General |  Savings & Investments |  Annuties | 

Absolutely rubbish

21 July 2004 Angelo Coppola

(22.7.04) Today, we enter the debate on absolute return funds which are currently in vogue.

Mark Seymour & Adrian Clayton, at PSG Fund Managers say that every year the marketing machines of many institutions go full throttle to push the latest investment fad.

Ironically, this tends to happen at exactly the moment when investors should be considering the opposite approach.

Examples of such twisted advice includes selling IT counters from 1998 to 2000,when resources were the place to be, rand hedges instead of small caps in 2002 and in 2003, and absolute return funds when the ALSI Index has been at levels last seen when Van Riebeeck stepped onto the shores of the fairest Cape.

So, whilst the timing of selling absolute products has in many instances been inappropriate, absolute return funds are not per se bad, and neither is the principle behind these products.

A fund targeting a return above inflation or cash can be an effective tool for clients seeking to preserve capital in real terms.

I will today not explore the merits of the product; we will instead merely examine the types of performances and volatilities seen from funds placed within the Targeted Absolute and Real Sector as specified by the ACI.

It is important to note that the sector is new and funds have migrated from other parts of the unit trust universe to this sector.

For this reason, statistics must be carefully interpreted. The first point to make is that the sector reveals the difficulty of 'enhancing cash' over the past year.

This is so due to the shocking performance from bonds and the volatility seen in property over the past 12 months. The real enhancing asset class has been equities and the predicament faced by absolute return managers is that equities offer the potential for superb returns, but also create risk over the short term.

Their mandate is thus an extremely difficult one. Cash has produced a return

of approximately 8.5% for the year, yet at least six absolute return funds have produced similar or lower returns, but with higher standard deviations.

The second point to make is that by examining historical data, we know that any fund with a standard deviation of more than 5%, tends to have a good chance of delivering negative returns over a one year period should an uncertain market condition prevail.

Thus, any fund to the right of this standard deviation, needs to offer capital 'guarantees' for periods of longer than one year - i.e. a three year rolling period.

This final point is certainly worth reiterating as funds within the absolute return sector make active use of derivatives, which lends itself to other risks which we have not attempted to quantify in this note.

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