EDITOR'S LETTERMerryn Somerset Webb
A cheaper way to diversify
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.
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.
• Read the full editor’s letter here: A cheaper way to diversify