Experts from BNYM, Fidelity, BlackRock and other top groups give us their views.

Paul Feeney

Head of international distribution, BNY Mellon Asset Management

Providing clear and transparent guidance to investors to help them understand the difference between all funds in the sector is paramount. It is particularly important to emphasise to customers the absolute return objective is not over all time periods and, like any target, there are circumstances where this may not be achieved.

At BNY Mellon we would support a reorganisation of the IMA Absolute Return sector into two classifications: funds that aim for absolute returns over, say, a 12-month period, and funds that aim to do so over a longer period.

The former would be constrained in terms of how they can invest and would, perhaps, exhibit more bond-like characteristics, ie low volatility and correspondingly more moderate returns. The latter would have greater investment flexibility and so may provide higher total returns over that time period.

Both, however, would have a cash-plus or cash-like benchmark. The IMA has an important role to play in ensuring fund managers have the appropriate risk controls in place to deliver against their aim, be it over a 12-month objective or a longer term one. Real people want real returns. For the first time fund managers are being asked to deliver against a benchmark that only goes up.

Clarifying and policing the sector is what is required not scrapping it, which would simply send the industry back into its comfort zone of trying to beat each other rather than deliver performance in a manner that matters.

Robert Higginbotham

CEO Europe for Fidelity International

I believe there are inherent risks for customers posed by the expectations that can be inferred from the name absolute return. To some extent what these funds appear to offer is the prospect of financial alchemy, producing equity like returns with cash like risks.

The name absolute return is now associated with an overly-broad and diverse range of funds. While there may well be some good funds with this name, I am sure that the number carrying the name is greater than the number truly capable of delivering against the absolute return expectations.

Consequently the risks for investors still remain. In order to avoid these risks, we need to take action to make sure investors properly understand these funds before the increasing attention in this area from the regulators turns in to anything more intrusive.

Mark Elliott

Head of UK retail sales, BlackRock

Absolute return funds should not be the next mis-selling scandal, but a number of funds within the sector are not true absolute return funds. The sector is so broad it is not always clear to investors what they are buying. What must be clear to the investor are the guidelines to which the portfolio is being constructed. When BlackRock launched UK Absolute Alpha in April 2005, there was no Absolute Return sector.

Now there are 11 different strategies being employed by providers, with funds spanning multi-asset, bond and equity asset classes. Absolute Return is the right label to use for these funds, but categorisation within the sector must evolve. One option could be to sub-categorise funds by volatility, enabling investors to make performance comparisons without making the wrong assumptions.