| Do Absolute Return Funds Deliver More than Fees? |
by John Jagerson The financial markets were definitely disrupted in 2008-2009, which is a little scary for investors but industry disruptions often lead to new innovations. Some new products are good, others are bad and some could be good but just have really bad execution. Today's article about a great idea that can be done well or very poorly. 
Absolute return funds is the title given to a growing mutual fund segment currently promising above inflation returns with smooth profitable performance. This is a compelling marketing pitch considering the concerns about inflation and volatility in the market today. The funds are proposing to deliver returns and stability though active management and asset class diversification. The active management for this style of fund can be described as pretty extreme. The fund managers will use market timing techniques to move from short to long positions and changing exposure levels to different asset classes as they see fit. This level of flexibility is usually associated with hedge funds. Of course, all this flexibility comes at a steep price with fees that can really add up. For example, the Putnam Absolute Return Fund 500 will charge you 5% to buy the fund and 2.25% annual fees to compensate management. That seems a little extreme and can soak up a lot of profits. Paying 2.25% per year means that in 10 years you will have paid the management team almost 17% of your total portfolio regardless of returns. High fees and big promises are typical of this style of fund. Learn more about why fees are so dangerous to your long term returns. The question becomes whether the manager's talent can actually make those high fees worthwhile. Evidence would suggest that it is not worth it. For example, we searched the Putnam site for other funds managed by the Absolute Return Fund 500 manager to see what his track record was like. Of the first 5 funds we found he had not been able to outperform reasonable benchmarks in the long term. This certainly throws doubt on theirforecasted performance within this new series of funds. This is typical of most of these kinds of funds. They charge a lot and have very nice marketing materials but fail to deliver results. For example, here is a fund in this category with a longer track record managed byHussman Funds that is supposed to actively manage a low risk portfolio of Treasury and AA corporate bonds. You can see how its price performance has compared to the iShares 7-10 year Treasury ETF (IEF) over the last 5 years.  So what advantage does the iShares fund have over the Hussman actively managed fund? It can be summarized as low fees and passive indexing. Active management is expensive and on average does not outperform passive indexing. However, the principles of asset class diversification is still a good one. The good news is that you don't need to pay anyone exorbitant fees to do this kind of investing. If you want to diversify your portfolio beyond stocks and into bonds, commodities, options, forex etc. you can do it with indexed ETFs and funds. Keep your fees and learn how to do this kind of investing by starting here. Next: How the Fed Works and Why it Matters to You
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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