February 27, 2013 9:50 pm

IMA to overhaul absolute return sector

Fund managers have agreed to rename the ‘absolute return’ fund sector, following concerns that consumers are being misled by its name.

On Wednesday, the Investment Management Association, which represents more than 200 fund providers in the UK, announced that the sector name would be changed to ‘targeted absolute return’ from June 1 – to indicate that investment returns are a target and not a guarantee.

Absolute return funds are marketed to investors as lower-risk investments that aim to protect them from the worst swings in the stock market.

Most try to achieve a return in any market conditions over a 12-month period using a variety of strategies, including short selling stocks.

However, the Financial Services Authority has previously criticised the labelling of these products for creating an impression that returns are guaranteed.

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

As part of an overhaul of the sector – which follows nearly a two-year review – the IMA has extended the timeframe over which the funds will seek returns, dropping the current 12-month timeframe. Funds will now be able to take as long as three years to meet their stated investment objective.

The IMA also plans to publish data showing the consistency of returns achieved, over rolling one-year periods. In addition, investors will be able to use an online filter to make it easier for consumers and advisers compare funds with similar investment strategies. This filter tool is due to be launched in the third quarter of 2013.

But the changes have been criticised by financial advisers.

Adrian Lowcock, head of investment research at Hargreaves Lansdown, said the new name still had the potential to mislead investors.

“The word absolute is still likely to suggest to investors that there is some implicit guarantee of positive returns,” he warned. “Adding targeted to the name does not clear this up and it could make things worse. Investors may now interpret that funds in this sector are targeting a specific absolute return.”

The IMA has decided against splitting the sector into subgroups, which had been suggested as a way of highlighting the range of strategies used by absolute return funds. However, it said it might look to reconsider this in the future.

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