Risks of absolute power
OLDER investors and pensioners may be putting their savings in jeopardy by investing in supposedly low-risk absolute return funds.
Millions of hard-pressed savers have been advised to invest in targeted absolute return funds, which aim to deliver a higher return than cash, but with less volatility than the stock market.
They are built to offer investors a positive return regardless of what happens to share prices. They do so by investing in shares, bonds, cash, property and financial instruments such as derivatives to produce a “targeted” return each year.
Savers seeking capital protection have flooded into these funds, making this one of the most popular investment sectors of all.
However, certified financial planner at Chase de Vere Patrick Connolly says some absolute return funds are sailing too close to the wind.
MISSED TARGETS
Out of more than 3,000 funds, three of last year’s four worst performers were in the targeted absolute return sector with investors suffering big losses, says Connolly: “FP Argonaut Absolute Return lost 25.6 per cent, CF Odey Absolute Return lost 17.8 per cent and Old Mutual UK Opportunities lost 11.6 per cent. It is clear these funds are taking too many risks.”
Connolly says it is astonishing that funds which aim to offer a positive return year after year can lose so much in such a short period: “This is not what investors in this sector would expect.”
FP Argonaut Absolute Return’s disastrous 2016 performance followed three years of double-digit gains but Connolly says this is also a problem: “While an investor might be happy with big gains, if a fund is taking that much risk it could also be liable to significant falls.”
He says many pensioners and older people rely on the sector to provide capital protection and funds taking excessive risks should be stripped of absolute return status.
NO RETURN
Connolly even suggests the absolute return sector should be scrapped altogether as the dangers are impossible to gauge: “It is putting the financial interests of investment companies ahead of investors.”
Mike Gordon, technical director at wealth managers Rutherford Wilkinson, says choppy performance shows that funds are failing to keep their promise of delivering returns regardless of what happens to the stock market: “The clear disparity in performance highlights the range of strategies used, some of which are complicated and traditionally found only in the hedge fund industry.”
Gordon says many funds perform really well in some periods yet miss their target in others: “Given these extremes, they are definitely not doing what it says on the tin.”
The largest fund in the sector, the huge £25billion Standard Life Global Absolute Return Strategies, fell 2 per cent last year, while the FTSE 100 gave a total return of around 20 per cent – or 10 times as much.
Gordon explains the “struggling behemoth” has an enormous array of different and complex strategies and this has hit performance: “It makes far more sense to build a balanced, diversified portfolio of cash, bonds and investment funds to match your own attitude to risk.”
AB FAB?
Peter Griffin, investment director at advisers Gale & Phillipson, says some cautiously managed absolute return funds can be a useful way of reducing risk: “We have used the Premier Defensive Growth Fund as a genuine alternative to cash and government bonds.”
According to Trustnet.com, the fund grew 2.4 per cent over the last year and 20 per cent over five years. Griffin has also used the Kames Absolute Return Bond, up 1.8 per cent over the last year and 8.5 per cent over five years.
So if you hold any absolute return funds, you need to check whether they have been absolutely fabulous or an absolute disaster.
A UK MANUFACTURER of lowemission vehicle systems is enjoying a £3million sales boost driven by global demand for cleaner buses and coaches.
Grayson Thermal Systems saw its turnover rise to £28million last year, helped by international orders for its new generation of fan and battery temperature-control technologies, which it has developed for the electric and hybrid markets.
As well as lowering emissions and improving air quality, the innovations also help fleet owners increase reliability and make substantial savings on both fuel consumption and maintenance costs.
Grayson is a three-generation family firm that began in 1978 as a car radiator repairer and now employs 270 staff across four sites in the West Midlands. It also runs plants in the US and Poland making products in low to mid volumes, as well as bespoke for original manufacturers.
Grayson continues to expand despite economic uncertainty and rising material costs, and interest in its innovations is strong, says managing director Stuart Hateley, 52, right. “As the world moves to even cleaner hydrogen fuel cells, hybrid and even full electric vehicles, we will continue to work with specialist vehicle manufacturers and operators to deliver cooling, heating and air-conditioning solutions, both