Absolute return funds: too good to be true?

Absolute return funds that protect investors from the worst of a downturn are becoming popular. Should you invest in them? Piper Terrett investigates.

With China's "Black Monday" generating stockmarket mayhem around the world, you might be feeling a little nervous. It can be tempting to pull your savings out of all markets entirely and sit in cash. But while we'd always suggest having part of your portfolio in cash (it's always good to have some powder dry and cash also has characteristics that make it a useful portfolio diversifier), making big decisions in reaction to sharp moves is often something investors live to regret.

Wouldn't it be better if you could have a fund that would put a cautious investor's mind at ease by holding a nice mix of defensive assets and aiming to protect you from the worst of a downturn? That's an attractive sales pitch, and the financial industry knows it. Hence the rise of the "absolute-return" fund. The basic point of these funds is to ignore what the stockmarket is doing, and simply aim to achieve a positive "real" (after-inflation) return each year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Piper Terrett is a financial journalist and author. Piper graduated from Newnham College, Cambridge, in 1997 and worked for Germaine Greer and for Adam Faith’s Money Channel before embarking on a career in business journalism. 

She has worked for most top financial titles, including Investors Chronicle, Shares magazine, Yahoo! Finance and MSN Money. She lectures part-time at London Metropolitan University and is the author of four books.