UK's FSA To Examine Criticised Absolute Return Funds

Max Skjönsberg

3 August 2012

The UK financial regulator will be looking into funds which bill themselves as absolute return funds, as it believes some investors might not understand the risks involved.

The country's Financial Services Authority said it is planning to publish a report on such funds this autumn.

Absolute return funds are designed to deliver positive returns in all kinds of market environments. A spokesperson for the FSA told this publication that some consumers might be led to believe that these funds have capital protection or "a level of guarantee".

At the same time, the spokesperson said that the regulator sees greater risks in other products, as absolute return funds are regulated and have a high degree of disclosure. The spokesperson said that the funds were a "potential concern" rather than a "current issue".

“We have been calling for the mis-labelling of absolute return funds to be investigated for the past two years and we are delighted that the FSA has finally started to address this," said Alan Miller, co-founder and chief investment officer at investment manager SCM Private.

“The current IMA label does little to avoid misleading consumers and it claims that absolute return funds will aim to achieve positive 12-monthly returns in all market conditions," Miller said. "This is yet another example of how the IMA has been ignoring consumers’ best interests and does little to encourage consumer confidence in the products they are buying.

“Absolute return funds are not transparent, net return figures conceal a host of fees and performance charges that prevent investors from making informed decisions," Miller said. "We doubt absolute return investors really understand how the combination of high performance fees and other costs savage their investments."

The UK investment Management Association's Absolute Return sector recently received criticism from IFA firm Informed Choice, which said that only three out of the 51 funds in the sector are suitable for investors. Two-thirds of such funds received less than half of the maximum possible in a consistency and cost test carried out by the firm. The firm considered ten different factors around consistency, risk-adjusted returns and cost. Each factor has a maximum possible score of 10 and the maximum score is therefore 100. The fund judged the minimum threshold for a fund to be deemed suitable to be 80.