Has the nanny state gone too far?

Wed Jul 27, 2011

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COMMENT by Joy Dunbar, Editor of Absolute UCITS


Even water is bad for you if you have too much of it, but it does not come with a health warning. So it is probably not surprising that all regulated investments aimed at retail customers come with wealth warnings.

What is baffling however is that retail investors are being warned that absolute return UCITS sector that is ‘prone to mis-selling’, according to a Fitch Ratings report.

But are absolute return UCITS riskier than other investments? Some investments appear to be riskier than others. Does the apparent perception of extra risk mean that these types of investments should come with an extra layer of protection?

The report states that the sector is riskier because there are no commonly agreed, standardised definition of what is an absolute return fund is.

Also investors may be disappointed by the products if they do not understand the risk/return characteristics and the products may face style drift. 

Absolute return UCITS funds do not come with guarantees attached, but aim to achieve a positive return over specified period of time, and when purchasing these funds retail investors should be told of the potential risks. Like all investments—especially in the hedge fund space—there are some great ones and some are utter rubbish that should never see the light of day. No sector or strategy is exempt from this.

However, to label any particular class of retail regulated investment product as dangerous or to say that there is an increased chance of mis-selling is misleading as you can’t look at the sector in isolation.

We are entering into an age where financial markets especially equity markets are expected to be more volatile because of geopolitical problems, sovereign debt crises and government manipulation of some markets have created imbalances in highly correlated markets.

Indeed the last decade has seen some great rallies – which I am sure absolute return managers did not fully capture. However, if an investor invested in a fund right before the dot-com crash in the early part of the last decade and took their money out in the aftermath of the credit crunch I am sure that the investor would be disappointed if the fund manager just beat its benchmark by a few percentage points as the amount they invested would have decreased.

Absolute return funds endeavour to preserve capital and create slow steady returns over time – especially if the returns are compounded. Like any investment investors should do their due-diligence or ask questions from their investment adviser. 

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