The FCA should tackle fees’ transparency and meeting of objectives in its review of the absolute return sector, argues Architas investment director Adrian Lowcock.
Poor performance and the flood of money into the funds in recent years has prompted the FCA review.
Lowcock says: “The FCA has started from the hardest sector to review as it is very difficult to investigate. The absolute return sector as well as the specialist sector are so broad, every single fund is bespoke so you need to look at funds individually.”
Around 21 out of 58 funds in the sector with a five-year track record had returns less than Libor +3 per cent, but only two funds actually lost money, Lowcock says.
“You won’t have a great performance overall, but you do have a high level of capital preservation,” says Lowcock.
He says absolute return funds have a reputation for high charges and performance fees and that is what the FCA should focus on.
“The FCA should tackle transparency of fees and meeting of objectives within the sector as these are measurable compared to performance fees which are difficult to analyse.
“Performance fees raise the question on how much the fund manager actually earns for a given period. This is not easy to find out. Also some of these funds are small or private discretionary funds in some cases.”
Two-thirds of absolute return funds have posted negative returns for this year, with the worst offenders down around 20 per cent since January, Morningstar reports.
Assets in UK-domiciled absolute return funds rose to a high of £59bn last year, its highest ever. The first six months of this year have seen another £5.3bn of inflows.
Lowcock adds: “Objectives for absolute return funds are often not clear. No one really understands what GARS actually do, for example.
“The FCA should try to achieve better clarity on performance fees, making these more transparent, and a better understanding for returns for investors, not for fund managers.”
Lowcock also says the regulator should look into who absolute return funds are sold to as well as what performance fees actually pay and with what expectations.
He says: “The trouble with the sector is: are investment returns predictable? Although these funds get as close as possible to their return targets they still don’t guarantee that, so looking at how you are getting value for money as it all depends on when you buy the fund.”