Can Absolute Return Funds Hit Their Targets?
"If a fund moves in the same direction as the market, then you should not call it an absolute return investment," says Terry Tian, a Morningstar analyst.
Some analysts have gone so far as to argue that regulators should bar most funds from calling themselves absolute-return vehicles. Fund companies argue the absolute return funds are not misleading investors. In their disclosure documents, the funds clearly state they may sometimes lose money in downturns. The absolute return funds are worthy of the name because they do not always track the benchmarks. The fund companies contend that the SEC permits some latitude in naming funds. For example, funds can label themselves as growth portfolios -- even if the performance does not always justify the name.
Cases in Perspective
To appreciate the debate over the funds, consider Putnam Absolute Return 300 (PTRNX). The Putnam fund seeks to outdo Treasury bills by 300 basis points (3 percentage points) annually over a market cycle. During the past three years, the fund returned 3.1% annually. But in 2011, Putnam lost 4.4%. Seeing the data, portfolio managers argue that the Putnam fund is on track to meet its long-term target. Critics contend that the fund offers uncertain protection.
Check Out Our Best Services for Investors
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts