More and more absolute return – or ‘target’ – funds are being offered by finance firms. The funds aim to make returns that match the base rate plus several percentage points, and the funds’ marketing suggests that they can make returns in rising and falling markets – a bold statement. But, as The Sunday Telegraph points out, “the existing track records are far from encouraging”. Take the Credit Suisse Target Return Fund, which aims to return 2.5% plus Libor (a money market interest rate, currently 4.65%) each year. It’s returned 3.7%. In addition, groups such as Credit Suisse, UBS and Threadneedle quote gross objectives – meaning that targets don’t factor in fees and tax. For example, Threadneedle, which aims to return 160% of Libor (about 7.2%), would in fact make less than 5% after 20% tax and annual charges of 1.25%. Over the past eight months, though, it’s made a net return of 2.7%.
Although some have missed their targets, the funds are still performing well, according to Darius McDermott of Chelsea Financial Services. Take Old Mutual Prosper 80, which aims to return cash plus 4%. It’s returned cash plus 3%, which is still a good return. “It’s a low risk way of using a cash alternative”, he says. However, he does admit that as a breed they have proved to be disappointing. He suggests that if you are going to buy into one, choose a multi-asset target fund that invests across a wide range of assets from equities to private equity, rather than the fixed asset ones that have “all had difficulty” recently.
Competition forces down fees
Competition between managers and intermediaries is dramatically decreasing the cost of putting your money into pooled funds, as figures from The Daily Telegraph reveal. In fact, not only can you avoid many, if not all, of the front-end charges of unit trusts and open-ended investment companies (Oeics), one firm, Alliance Trust Savings, is now offering £250 cashback until the end of this month if you transfer your PEP or ISA to them. Other discount brokers are offering everything from free advice to the waiving of initial fees. It comes as no surprise, then, that there’s often a catch; the AST scheme charges high fees each time you sell or change a holding, for example. Although competition in the sector is good for the consumer, “people should check and choose carefully before committing themselves,” says Anthony Yadgaroff of Allenbridge Investment consultants in the Telegraph.