Chase de Vere, a national firm of independent advisers, said in 2016, out of 3,071 investment funds available to UK investors, three of the bottom four performers were from the Targeted Absolute Return sector. FP Argonaut Absolute Return lost 25.6%, CF Odey Absolute Return lost 17.8% and Old Mutual UK Opportunities lost 11.6%.

The advice firm said: “It is clear that these funds are taking too much risk.”

It said this is a sentiment which is also likely to apply to funds which make sizeable gains.

“While an investor might be happy with big gains, if a fund is taking that much risk it could be liable to significant falls in the future. It should be noted that FP Argonaut Absolute Return made gains of 39.6%, 13.6% and 11.9% in the years preceding its 25.6% loss in 2016,” the firm said.

The Investment Association, the trade body for the fund management community, defines absolute return funds as funds managed with the aim of delivering positive returns in any market conditions, but returns are not guaranteed.

Patrick Connolly, a certified financial planner at Chase de Vere, said: “It is astonishing that funds which supposedly aim to provide a positive absolute return can lose so much. This is not what investors in this sector would expect and the performance of these funds is doing absolutely no favours to the sector as a whole or to the investment industry in general.”

 ‘2016 was a particularly difficult year to navigate markets’

Adrian Lowcock, investment director at Architas, the fund management group, said investors need to look beyond 2016 and assess the absolute return sector on a longer term basis.

He said concerns about Chinese growth spreading into commodities and oil prices and then to global equity markets, as well as the political landscape and surprise results in the EU referendum and US presidential election, made “2016 a particularly difficult year for absolute return managers trying to navigate markets”.

Responding to Chase de Vere, Old Mutual Global Investors said: “The [Old Mutual UK Opportunities] fund’s clearly stated objective is to “deliver an absolute return over rolling three year periods”.  As such, the fund’s aim is to generate a positive absolute return across the market cycle, rather than in any individual rolling 12-month period. Given the difficulty of timing markets, the fund’s directional views can lead to meaningful capital drawdowns at times.”

Mixed bag of funds

Lowcock noted the sector is a “mixed bag of funds and strategies” including funds focusing on emerging market debt to equities.

“This means it isn’t really possible to compare one fund with another or the sector as a whole,” he said.

Lowcock doesn’t dismiss the use of absolute return funds as part of a diversified portfolio.

“As with any manager, absolute return fund managers don’t always get the calls right, but they have a useful role to play in portfolio construction and can help to mitigate risk.

“The key for investors is to ensure they are buying the right fund for their needs, some are extremely aggressive, while others are more risk adverse.”

His advice is to look under the bonnet and make sure you understand what the fund aims to achieve and ask whether it meets your objectives.

Connolly, however, said the industry needs to “look very closely at the classification of Targeted Absolute Return funds”.

“It is a sector which is hugely popular with investors and in which they can place a large amount of trust that the funds will provide a reasonable level of capital protection.

“Funds which take excessive risks should be removed from the Absolute Return sector and reclassified elsewhere, such as in the Unclassified sector.”