Jargon buster: absolute return funds

Rob Zagey, manager of fund research and development at Stanlib, explains what Absolute Return Funds are.

“Absolute Return Funds are unit trust funds that use a variety of investment strategies to accomplish the following:

  • Target a return over a defined investment time horizon (for example, targeting a return of inflation + 5% over a three-year period). While this is not a guarantee, it provides investors with guidance as to what the fund is aiming to accomplish.
  • Protect investors against any losses incurred over a period of time, usually one year. Again, this is not a guarantee, but a statement of intent as to what the fund aims to accomplish.

The two objectives of generating a defined level of return while focusing on risk (the possibility of losing money) over the shorter term form the foundation of absolute return investing.

These types of funds have gained in popularity over the past decade as they broadly appeal to investors who prefer funds with more tangible investment objectives (even though they aren’t guarantees), investors who seek capital growth but are risk conscious, or investors with a combination of income and growth needs.

How are Absolute Return Funds different from typical Asset Allocation/Balanced Funds, you might ask? The answer probably lies in the fact that Absolute Return Funds generally have a greater focus on risk, whereas balanced funds are willing to sacrifice some of that risk for generating greater returns over the longer term.”

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