EUROPE - Allocating to absolute returns funds is not a 'magic bullet' solution to deliver guaranteed investment returns against targets, S&P Fund Services has warned.
Kate Hollis, lead analyst, S&P Fund Services, said: "Like other funds, absolute return funds may or may not achieve their objectives consistently, depending on manager skill and the market environment."
S&P said one third of over 90 Euro-denominated funds were launched after the end of 2006, meaning there was a very short track record to judge performance.
Over half of the remaining funds achieved a positive result in 2007 and over a quarter returned greater than the Euribor.
S&P warned investors should take care to understand the skills of each individual fund manager and the characteristics of each fund they invest in.
Hollis said: "If they do, they will be able to judge whether disappointing performance is due to market conditions, the constraints of the mandate or poor judgment by the fund manager.
"This sounds obvious but we have heard many comments over the last year, which suggest it is not widely understood. We suspect more funds will be launched in the coming months, some of which may use processes that have not been seen before in regulated funds. So there will be an increased likelihood of 'mis-buying'.
Collin Crownover, head of currency management, State Street Global Advisors, said: "The key determinant of an investment strategy's returns is the acumen of the responsible investment team and not whether it is an absolute return or benchmark relative strategy.
"However, an absolute return strategy provides a purer, less-constrained method for investment managers to translate their insights into returns and should therefore out-perform the alternatives, everything else being equal."
S&P also examined fixed income absolute returns funds and tactical asset allocation (TAA) funds.
It found fixed interest funds had been particularly badly hit by the credit crunch, with widening spreads contributing to few funds outperforming LIBOR in 2007 and early 2008.
TAA funds, S&P said, had also struggled, regardless of whether they were qualitative or quantitative based.
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