"Absolute tosh"

Sometimes the financial services industry makes us sooooo angry. If you like reading a good rant, you’ll love this article. It’s so ranty you could call us Ranty McRantFace.

Absolute return funds are absolute tosh

Absolute return funds are offered by big brand names such as Aviva and Standard Life.

The UK’s biggest single stock market fund is Standard Life’s Global Absolute Return Strategies (Gars). It was launched in 2006 as a ‘hedge fund for the masses’, predicted to make 5% a year more than you’d get from a bank account without the usual volatility of the stock market, and named a ‘top tip’ by Hargreaves Lansdown. As a result, lots of advisers put their clients in the fund, and it now holds nearly £20bn of small investors’ cash.

(Obviously, we didn’t – and we think the other advisers should have known better.)

Gars promised positive returns in ALL market conditions. However, Gars didn’t do what it said on the tin.

In fact, the returns on Gars are so poor that you would have earned more if you’d left your cash in the bank. If you’d invested in Gars in May 2013, your money would have grown just 0.7%. This compares with a 43.4% gain in the FTSE All Share Index over the same time period.

We’re not the only people who don’t like it.

Hargreaves Lansdown removed Gars from its recommended list in 2013. And Alan Miller, a senior figure in the fund management industry, is calling Gars “potentially one of the greatest mis-selling scandals in the UK”. He doesn’t mince his words, describing it as an “expensive, ridiculously complex, derivative-based fund with significant trading costs and counterparty risks accompanied by a delusional aim”. Whew, don’t sit on the fence, Alan!

Standard Life’s investment director, Chris Nichols, says Gars was meeting its targets until the end of 2015 but that low interest rates have “hurt the fund”. Today, the main investors in Gars are Standard Life’s advice business which is called 1825, and Standard Life employees.

Downside protection is a myth

Marketing departments of active fund management companies try to claim that their funds are all upsides with no risks. They offer potential outperformance when markets are on the up, with the reassurance of limiting your losses on the way down.

But if something sounds too good to be true, it probably is.

Their claims are impossible. Why? Because risk and return are related. You just can’t break the link.

Investors are compensated for the risk they take. If you want higher returns you must accept greater risk. You simply can’t have your cake and eat it too.

As always, we look at the data behind the blurb. And it turns out that managed funds generally do worse in market downturns than index funds, because they usually hold riskier equity portfolios and small amounts of cash.

Also, as we’ve said before, growth boils down to cost, and has little to do with skill and performance.

Further reading

After all that ranting, perhaps we’d better calm down, take a few deep breaths, and have a cup of tea and a biscuit.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100