"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. 4 Stocks That Are Real Sleepers in 2012 >> Can the absolute return funds deliver competitive long-term returns? Because the funds are so young, it is too soon to draw any firm conclusions about their performance. Still, many of the funds are intriguing because they have unusual flexibility to cope with difficult markets. Among the more flexible bond choices is Loomis Sayles Absolute Strategies ( LABAX). The fund has the ability to short bonds. That could be particularly important in coming years. Loomis Sayles managers say that for the past three decades, bonds have been in a bull market. Now many economists expect that interest rates will rise in the next decade. If that happens, bond prices will fall, and conventional bond funds could face hard going. In such a difficult environment, absolute return bond funds could race to the front of the pack. 8 Fertilizer Stocks Primed for Growth >> An unusual stock fund is WBI Absolute Return Dividend Growth ( WBIDX). To limit losses, the fund sells stocks after they have fallen by 10%. If the market craters, the fund can dump its stocks and shift to cash. The system is designed to protect shareholders from the kind of big losses that occurred in 2008.