Why fund names can’t always be trusted; ‘Absolute return’ funds that lose money, ‘smaller companies’ funds that hold FTSE 100 members, we look at the funds that don’t live up to their moniker.

Why fund names can’t always be trusted

‘Absolute return’ funds that lose money, ‘smaller companies’ funds that hold FTSE 100 members, we look at the funds that don’t live up to their moniker.

By Emma Wall

7:00AM GMT 09 Mar 2013

Fund managers have received a slap on the wrist for failing to achieve their investment goals. “Absolute return” funds aim to achieve positive returns in all market conditions – but the majority simply have not done what they claimed.

Angry investors accused the industry of misleading advertising, as funds such as BlackRock UK Absolute Alpha and GLG Alpha Select, which both sit in the Absolute Return sector, failed to deliver positive funds over the past three years.

In light of this poor performance, the Investment Management Association (IMA) has changed the sector’s name to “targeted absolute return” – a solution derided by critics.

Gina Miller, a co-founder of SCM Private, the fund manager, and a campaigner for transparency on charges, said the IMA had “taken 643 days to change one word”. She called the review an “absolute farce”.

Absolute return funds that consistently fail to live up to their remit could be expelled from the sector in future, under further changes announced by the IMA. However, they will not have to change their own names.

This is not the first instance of investment funds failing the “Ronseal test”: does it do what it says on the tin?

“The name of a fund can be really arbitrary,” said Darius McDermott of Chelsea Financial Services. ” ‘Special situations’, ‘cautious managed’, ‘absolute return’ have all failed to deliver.”

The IMA has started addressing this, renaming the cautious, balanced and active sectors in accordance with how much exposure to shares they had – the most cautious is called “Mixed Investment, 0pc-35pc Shares”. But more could still be done to help.

Mr McDermott added: “In every sector, it is important to make sure you research the individual funds – their investment process and underlying holdings – to make sure that you fully understand what the manager is investing in and why. Never rely on a name alone.”

We round up the worst offenders here.

Failing to deliver an absolute return

The BlackRock UK Absolute Alpha fund has lost investors 2.6pc over the past year versus a total return of 12.3pc in the FTSE 100 index, and is down by 7.8pc over two years against an increase of 14.4pc for the FTSE. Looking at five-year figures, the fund managed a positive return of 1.36pc, but the total return of the FTSE 100 trounced that – it rose by 31.5pc.

“Absolute return? Absolutely nothing,” said Rob Burgeman of Brewin Dolphin. “Targeted absolute return is not much better. It simply means they failed but at least they didn’t promise anything.”

Daniel Godfrey, the IMA’s chief executive, said: “One key purpose of our review of the Absolute Return sector was to make sure consumers do not inadvertently perceive there to be some implicit guarantee of positive returns due to the name. Adding the ‘targeted’ description to the name fulfils this purpose.”

Not so ethically sound

When the Gulf of Mexico oil spill took place in 2010, BP’s share price dropped by 30pc – and with it fell the value of seven ethical funds. These included Aberdeen Responsible UK Equity, M & S Ethical and Swip Pan-European SRI Equity.

Traditionally, ethical funds would take a more regimented approach to what they invested in. But the sector has evolved in line with its catchphrase, “socially responsible investment” (SRI). Rather than screen out stocks, funds that follow the SRI route take a more positive approach, investing in companies that adopt good environmental and social practices, regardless of sector. This gives managers a wider choice of stocks, which can help boost returns and reduce volatility. It is also why stocks such as BP make the grade for some ethical funds.

The Friends Life Stewardship fund – an ethically screened fund popular with private investors – features in its top 10 holdings BG Group, which extracts oil, GlaxoSmithKline, which takes part in animal testing, Standard Chartered, the bank whose employees have been found guilty of money laundering, and mining company BHP Billiton. It also holds AB Foods, owners of Primark, which dropped several suppliers after accusations of sweatshop labour.

Mr Burgeman said: “I have nothing against any of these companies – they are first class and leaders in their field – but it’s difficult to reconcile their inclusion within an ethical fund.”

Global only in name

If you invested in a fund with the name “global” in the title, you’d be forgiven for assuming it would be geographically diverse. But irregularly weighted indices and a lack of investable stocks in certain regions mean that some so-called global funds are actually made up in the majority of just two or three countries.

For example, BlackRock Global Equity has 58.5pc in the US, Axa Framlington Global Opportunities has 55pc in America and Henderson International holds 54.4pc in the US.

“To be fair to fund managers, this can be for a perfectly acceptable reason, as they might perceive there to be considerable value in that one area,” said wealth manager Philippa Gee. “However, it might not fit as well into an investor’s portfolio and therefore prove to be counterproductive.”

Approach with caution

Many cautious managed funds do not live up to their name, misleading investors into thinking their cash is safe. Research by Skandia asked investors how risky they would expect a cautious fund to be out of 10. Most put it at two or three but independent risk-rating analysis puts the whole cautious sector at five or six, with some funds scoring even higher.

“The cautious managed sector was always one to watch before its own name change,” said Mr McDermott. “But some funds still have ‘cautious’ managed in the name and are far from it.

“Some funds underperform the sector average by double-digit percentages – you wouldn’t expect this from the name. These funds need to be analysed fully before investing. For example, the JPM Cautious Total Return fund has negative returns over one, three and five years.”

Neither small nor beautiful?

Some smaller companies funds have surprising holdings, too. UBS Smaller Companies has Hargreaves Lansdown – a FTSE 100 company – in its portfolio.

Smaller companies funds often hold larger companies because the stocks were small when they bought them, have done well and grown in size.

If the manager sells the holding he or she cannot buy it again as it does not fit the remit – but they wish to continue to benefit from the company’s success.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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