Only one in four 'absolute return' funds have managed to produce positive returns in every year since 2010, according to new research by fund analyst FE Trustnet.
A whopping 31 funds have broken their promises to investors by losing money in at least one year of the past five.
Even more worrying is the fact that some of these 'safety first' funds actually rack up substantial losses over long periods. For example, investors in the worst funds could have lost between 26% and 35% of their money by buying and selling fund units at the worst possible times.
What are absolute return funds?
Absolute return funds are supposed to produce steady gains for fundholders, regardless of underlying market conditions. They do this by behaving like 'a poor man's hedge fund': going 'long' on (buying) assets they believe will rise in value, while 'shorting' (betting against) assets that they have identified as overvalued and thus heading for a fall.
By buying undervalued assets and shorting overpriced ones, absolute return funds aim to smooth out market fluctuations, producing steadier and less volatile returns for investors.
They should offer a guaranteed, if unspectacular, growth every year.
Enjoy tax-free returns from the stock market with a Stocks & Shares ISA
These funds are attracting record sums
Following investor complaints that not all absolute return funds were actually delivering consistent profits to investors, the Investment Association recently renamed this sector Targeted Absolute Return, indicating that absolute returns are merely a target and no cast-iron guarantee.
Nevertheless, with many investors worried that asset prices may be getting a bit rich, sales of absolute return funds are absolutely booming. Targeted Absolute Return was the top-selling fund sector in April, with net retail sales of £529 million being the highest since January 1992. What's more, it is this year's second-best-selling sector (after European funds), with sales exceeding £1.2 billion in 2015 so far.
Enjoy tax-free returns from the stock market with a Stocks & Shares ISA
Lost profits and broken promises
Clearly, cautious investors are pouring into this sector, drawn by promises that these specialist funds can ride out the next storm.
However, investors must think twice before investing in absolute-return funds, because the hype often flatters their true performance.
Over the past five years, only eight of these specialist funds produced positive returns, year in, year out. Of these eight, the largest by far is Standard Life Investments' Global Absolute Return Strategies (GARS), with £25 billion in assets. GARS uses multiple market strategies across a wide range of assets to try to maximise profits while minimising volatility.
At the other end of the scale, FE Trustnet revealed the three funds that lost the most money for investors. By buying in and selling out at the worst times, investors in the Thesis Cartesian UK Absolute Alpha fund could have sustained a maximum loss of 35%. For Premier ConBrio Managed Multi-Asset, the worst-timed loss would be 33% and, for City Financial Absolute Equity, 26%.
TAR for nothing
To investigate further, I crunched the numbers for all 65 funds listed by FE Trustnet in the Targeted Absolute Return (TAR) sector. Here is the overall sector performance for TAR funds over four different time periods:
| Time period | TAR sector return |
| Six months | 1.9% |
| One year | 3.9% |
| Three years | 15.2% |
| Five years | 19.6% |
As a whole, the TAR sector does indeed crank out fairly steady and reliable returns, averaging around 4% a year since 2010. However, what gives this sector a bad name is the very wide range of returns generated by supposedly similar-operating funds.
[SPOTLIGHT]Of the 65 funds in this sector, eight are fairly new, leaving 57 funds with at least a one-year record. For these 57 funds, one-year returns vary from an impressive 23.9% at CF Eclectica Absolute Macro to a loss of 2.3% at the 57th-ranked fund, Aberdeen Absolute Return Bond. Only 49 of 57 TAR funds actually produced profits for investors.
Over three years, the picture looks a little more promising. Of the 65 funds listed, 19 have no three-year record, but all remaining 46 funds have produced positive returns for their fundholders.
The highest return came from City Financial Absolute Equity (up 86.6% over three years), while the lowest was a disappointing 2.6% from Jupiter Absolute Return. Since the FTSE 100 index is up around 24% in the past three years (excluding dividends), these TAR returns aren't that impressive overall, with only 10 of 46 beating the capital gain of the FTSE.
Stretching our timescale out to five years, we find 33 funds in existence since June 2010. The good news for TAR fans is that all 33 made positive returns, ranging from a whopping 143.7% at CF Odey Absolute Return to as little as 3.9% for Jupiter Absolute Return .
Over the past five years, the FTSE 100 is up around 32%, excluding dividends. Only 15 of these 33 TAR funds managed to beat this index return. Add in regular cash dividends of, say, 3%-4% a year and no more than four or five TAR funds would have beaten the total return of the FTSE over the past half-decade.
So while TAR funds do tend to produce positive returns over time, individual performance can be very patchy and few funds dependably produce profits year in, year out.
Enjoy tax-free returns from the stock market with a Stocks & Shares ISA