Absolute return funds' woes mount

Branded the bad boys of the investment world, absolute return funds have gained a reputation for not doing what they're supposed to do. These funds, which should deliver returns above zero despite what is happening in markets, have done the opposite in many cases – by losing money.

The Jupiter Absolute Return fund run by the once "golden manager" Philip Gibbs, for example, was championed by Hargreaves Lansdown, but has just been kicked off its Wealth 150 list of best buy funds. Not only has it underperformed the market, but it charges a 15 per cent fee if it does manage to beat the benchmark.

"If it has a good period of performance, it will trigger this fee of 15 per cent on returns – we don't think that's right," says Rob Morgan at Hargreaves Lansdown. "Mr Gibbs could be given a fee for generating sub-inflationary growth in the fund."

But to dismiss all absolute return funds could leave you missing out on some solid, stable performances, especially during turbulent markets and times of uncertainty.

"Generating positive returns from absolute return funds in a world punctuated by sharp bouts of extreme panic and uncontrolled euphoria has been incredibly challenging," says Tom Becket of the investment manager PSigma. "In fairness to those who have underperformed the high expectations that were set to the absolute return sector, it is hard to imagine a less supportive environment to achieve their aims."

Still, although it's been a tough time for many of these funds, which aim to deliver a positive return on a 12-month basis, there are products out there that have managed to do what they say on the tin.

"Standard Life Guaranteed Absolute Return Strategies (Gars) and Newton Real Return have delivered decent returns with low volatility," says Morgan. "Generally funds that have some flexibility of approach have done better."

The Standard Life Gars fund, for example, invests across equities, bonds and currencies, as well as more niche areas, such as interest rates.

Mr Morgan explains the Newton Real Return fund has a core investment of equities and bonds, while at the same time using other elements such as gold to help benefit from a falling market.

"We think in terms of themes, and we are cautious on our outlook," says James Harries, the manager of the Newton Real Return fund. "GDP growth will be hard to come by and there is too much debt in the developed world … we've held this view about the difficult economic backdrop for some time."

Mr Becket, believes chief among the winning funds has been the Henderson Credit Alpha, while the Legg Mason Global Credit Absolute Return is another key fund, which he says has shown real signs of promise and does not take excessive risk.

But grinding out positive returns year after year can be challenging for the best of managers, and there has been a major disparity in returns among these funds. "There are some funds which seem to perform incredibly well and some that perform incredibly badly," says Patrick Connolly of AWD Chase de Vere.

Over the past year, Mr Connolly highlights the CF Odey UK Absolute Return fund which has grown by 31 per cent, while the SVM UK Absolute Alpha fund has fallen by 21 per cent. "Neither of these performances are what you would expect if you are looking for steady and consistent returns," he adds.

"Stock markets are likely to remain volatile and so we can expect continued demand for low risk funds from investors looking for a safe haven," says Mr Connolly. "And we can also expect many investors to be enticed into paying higher fees for absolute return funds they don't really understand and for performance which may not live up to their expectations."

Emma Dunkley is a reporter at citywire.co.uk