A cheaper way to diversify

Targeted Absolute Return Funds aren’t all awful, says Merryn Somerset Webb. But you'd think there'd be a cheaper way to diversify. Happily, there is.

How is the UK investing at the moment? Not, it seems, with great enthusiasm. We invested a net total of £1.6bn in April, says the Investment Association. That's not much more than half the amount invested in April last year. It doesn't suggest much confidence.

Run your eye down the list of the best-selling funds and you won't see much conviction there either. The best sellers are Targeted Absolute Return Funds (which pulled in a record £529m in April). This all makes sense. The huge rises in stockmarkets in the last few years, combined with a now-very-obvious bond bubble, are making everyone nervous (us included).

So investors are committing less money overall, and when they do, they're looking for products that seem to offer security the kind suggested by the words "targeted" and "absolute return". The idea is that with a clever mix of assets and perhaps a derivative or two, absolute return funds can provide positive returns, regardless of what's going on in the markets.

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The problem? There's the sector's feeble performance (up on average a mere 20% over the last five years, versus 45% for the FTSE All-Share). Then there's the fact that they have tended to move in the same direction as the equity market as a whole. So it is, says Patrick Connolly of Chase de Vere, "very unlikely" that they will provide positive absolute returns when the next crisis comes.

Their underperformance also doesn't come cheap: many charge a good 1% in annual fees (often 1.5%) and chuck in hedge-fund style performance fees (think 20%) for managing to beat pretty feeble benchmarks. That's not a structure we approve of. At all.

Targeted Absolute Return Funds aren't all awful (you could argue that top performers, such as Argonaut Absolute Return, have earned their fees in the last five years), but if you want to delegate the diversification of your portfolio and cut your long-term risks, you might wonder if there isn't a cheaper, better way to do it. There is.

In this week's issue,we look at the asset classes we like and those we don't, and discuss why. But now we're going further than that. We wanted to come up with a way to use those preferences to build a diversified, passive portfolio that would suit any MoneyWeek reader looking for a straightforward way to invest and grow their money over the long run, one that takes account of all the things we constantly bang on about here at MoneyWeek such as keeping your costs down by using cheap exchange-traded funds to bypass generally overpriced fund managers, and focusing on beating inflation rather than on some arbitrary benchmark.

So that's exactly what we've done. John Stepek explains more about what we've called our "Lifetime Wealth" portfolio here, and how you can get hold of it. It's only open to MoneyWeek subscribers, it's something we've never done before, and we're really excited about it I hope you'll give it a try.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.