Absolute funds are flavor of the month

Mutual fund companies are be-ginning to churn out products that focus on delivering absolute, rather than relative, returns.
FEB 08, 2009
Mutual fund companies are be-ginning to churn out products that focus on delivering absolute, rather than relative, returns. Driving the trend is the fact that thanks to a sour market, a fund with good relative performance may not actually provide positive returns. As a result, investors are looking for good absolute returns. That is one reason that Putnam Investments of Boston last month launched four target absolute-return mutual funds designed to seek annualized total returns of 1%, 3%, 5% or 7% above those of U.S. Treasuries over a period of three years or more. The funds strive for absolute returns by implementing strategies that can involve active security selection, tactical asset allocation, currency transactions and options transactions. Putnam's efforts come on the heels of similar efforts at Pacific Investment Management Co. of Newport Beach, Calif., adviser to the Pimco Funds. The firm launched the $494.8 million Pimco Unconstrained Bond Fund (PUBAX) in June. Rather than attempt to outperform a benchmark index, the fund is managed with an absolute-return focus. And Goldman Sachs Asset Management LP of New York launched the $131 million Goldman Sachs Absolute Return Tracker Fund (GARTX) in May. Its aim is to approximate the returns of the Goldman Sachs Absolute Return Tracker Index, which seeks to replicate the investment returns of hedge fund betas. Given investor hunger for positive returns, it is almost certain that other companies will offer similar products, said Howard Schneider, president of Practical Perspectives, an industry consulting firm in Boxford, Mass.

'COPYCAT INDUSTRY'

"This being a copycat industry, others will jump in," he said. But what they are jumping into may not necessarily be what it seems. The packaging may be new, but absolute-return strategies have been around for a while. Advised by Absolute Investment Advisers LLC of Hingham, Mass., the $801 million Absolute Strategies Fund (ASFIX) was launched in 2005. Its basic strategy involves allocating assets to a dozen or more underlying managers, using separate accounts. Some of the strategies include dollar-neutral long-short equity, hedged convertible market-neutral, synthetic short-sale investing, long-short hedge equity, small-cap equity and European equity. The Absolute Strategies Fund is just one of a handful of funds in the long-short mutual fund category maintained by Morningstar Inc. of Chicago. Another is the $148 million Rydex Absolute Return Strategies Fund (RYMQX), launched by Rydex Investments of Rockville, Md., in 2006. So what makes the new breed of such funds different? At least in Putnam's case, the funds target a specific return, said Robert L. Reynolds, the firm's president and chief executive. "We're bringing to the retail investor a whole new category of mutual fund investing," he said.

SKEPTICISM ABOUNDS

Financial advisers, however, are skeptical. "These mutual fund companies, they are in the business of marketing a product," said Stephen Gorman, president at Gorman Financial Management of Hingham, which has $150 million in assets. What Putnam has developed seems less like something new and more like "a further iteration of what is out in the marketplace," Mr. Schneider said. And what is already out there in terms of absolute-return funds has been a disappointment. A look at two of the older funds of this type illustrates the point. The Absolute Strategies Fund was down 15.13% for the one-year period ended Feb. 2 and down 2.77% for the three-year period, according to Morningstar. And the Rydex Absolute Return Strategies Fund was down 17.37% for the one-year period and 5.22% for the three-year period. "I just don't think they can do it," financial planner Steven M. Elwell said of absolute-return funds. He is with Schroeder Braxton & Vogt Inc., an Amherst, N.Y.-based firm with $220 million in assets under management. Firms such as Putnam disagree. "Absolute-return products have been used by institutions and high-net-worth investors," Mr. Reynolds said. "We're just bringing it to retail investors." E-mail David Hoffman at [email protected].

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