Sim­ply sur­real

The unreal world of real re­turn funds

Finweek English Edition - - Companies & Markets -

sur­re­al­ist artist Sal­vador Dalí’s jux­ta­po­si­tion of a lob­ster and tele­phone cre­ates a star­tling im­age, try this for real world sur­re­al­ism. One unit trust fund pro­vides a pos­i­tive re­turn of 16,2% over the past dif­fi­cult year; an­other unit trust in the same cat­e­gory posts a neg­a­tive 26,7%.

What takes that com­par­i­son into Dalí’s ethe­real world is that both funds are meant to pro­vide in­vestors with a re­turn a few per­cent­age points above inflation. It seems sim­ple. So how do two unit trusts mak­ing sim­i­lar prom­ises end up with vastly dif­fer­ent re­turns?

You guessed it: it’s the world of tar­geted, ab­so­lute and real re­turn unit trusts. I’ve long been crit­i­cal of the con­cept be­hind those funds. Some of the funds I be­lieve are well man­aged; some are pretty good funds. My crit­i­cism is rather with the mar­ket­ing ma­chine – promis­ing a low-risk re­turn above inflation is a great sell­ing point – and with the ad­vice that has many in­vestors in such funds when they should be in some­thing else (most likely with a lower fee struc­ture).

Any in­vest­ment fund should be aim­ing at giv­ing clients a real re­turn. A pure eq­ui­ties fund will achieve that over longer pe­ri­ods of time and in­vestors should un­der­stand there will be pe­ri­ods, such as the past year, when the fund shows neg­a­tive re­turns.

That’s where real re­turn funds are meant to ease in­vestors’ anx­i­ety. The im­plicit un­der­stand­ing is that the fund will be con­ser­va­tively man­aged to meet its stated bench­mark, any­where from two ba­sis points to around six ba­sis points above inflation.

So apart from the two ex­treme ex­am­ples above, are th­ese funds liv­ing up to their inflation-beat­ing prom­ises? Look at the past year. Tak­ing a 10% re­turn as a low tar­get (most bench­marks will be pitched higher), only nine of the 60 unit trusts listed in the cat­e­gory beat 10% (read­ers can see the num­bers on the unit trust page at the back of this is­sue). So much for pro­vid­ing a real re­turn.

But I can hear howls of protest. Last year was one of the more dif­fi­cult seen in in­vest­ment mar­kets and most of those funds set bench­marks over a three-year rolling pe­riod. Fair enough – even though a pe­riod of three years is a very flex­i­ble man­date and not good for the nerves of the types of in­vestors who should be in th­ese funds.

Let’s look at three years and lower the tar­get to 8%. Of the 39 funds that have been around for more than three years, 18 have beaten 8%. Again, far from a real re­turn for most in­vestors in th­ese funds.

The rapid growth in the num­ber of real re­turn funds also shows how pop­u­lar they are as a mar­ket­ing tool. And cau­tious fi­nan­cial ad­vis­ers (they’re all cau­tious nowa­days with the po­ten­tial threat of per­sonal li­a­bil­ity for bad ad­vice) of­ten see them as the ideal prod­uct for clients. They prob­a­bly can’t get sued for putting clients into a fund that prom­ises a real re­turn and, if it doesn’t, don’t blame me, blame the fund man­ager. That’s why so many in­vestors who shouldn’t be in real re­turn funds are herded into the prod­ucts any­way.

So if three years aren’t enough to see th­ese funds pro­vid­ing the promised real re­turn, how much time is enough? Pic­tures of Dalí’s time­less melt­ing clocks come to mind.

Dalí was good at com­ing up with quotable quotes and here’s one that’s ap­pro­pri­ate: “If one un­der­stands one’s paint­ing in ad­vance, one might as well not paint any­thing.”

While there are some ex­cel­lent real re­turn fund man­agers (even if they’re manag­ing for the wrong clients), Dalí’s quote could ap­ply to the sur­re­al­ist bunch on the fringe. Some­thing like: if we un­der­stand in ad­vance the bench­mark is CPI plus 2%, why man­age the fund at all? Let’s do some­thing dif­fer­ent – shoot out the lights, even at the risk of scor­ing a lower re­turn than the al­lshare in­dex.

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