30 September 2013

Absolute Return Uncertainty

Absolute Return funds were introduced a few years ago with the objective - in general - of providing investment growth which is "absolute" rather than relative. Typically they try to do better than a cash-based benchmark like the Bank of England's Base Rate.

Although it wasn't always obvious where they fitted into a diversified portfolio, I was keen on them initially since they aimed to provide investors with what they wanted - after all, who is interested in their investments just doing better than a benchmark which is itself falling by several percent a year?!

However, they rely in part on the non- / low correlation between equities and fixed interest to keep things on an even keel. With the upside-down world we now have due to Quantitative Easing, those asset classes are more correlated for the time being, so it's likely to be increasingly difficult to provide an absolute return in a fund.

As a result, they could end up acting more like a multi-asset managed fund. Nothing wrong with that if well managed, but absolute returns may not be achievable.

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