What's in a Fund Name?

October 12, 2009
Michael Sheehan

During one of the worst bear markets in history, Wall Street marketers created the “absolute return” fund. As with any scheme that sounds too good to be true, this one probably is.

At some point during one of the worst bear markets in history, Wall Street marketers got the idea that investors wanted a degree of reassurance and thus the “absolute return” fund was born. The pitch was that these funds were strategically designed to make money regardless of what happened in the stock and bond markets. And, as with any scheme that sounds too good to be true, this one probably is, say some market experts, even if it’s backed by well-known Wall Street names.

The upfront downside, say market analysts, is the price tag on these funds. Expense ratios average 1.6% and quite often go above 2%. Perhaps just as important is that the funds’ performance too often doesn’t match the hype. Most of the funds that were around at the start of 2008 lost money over the course of the year, just like almost every other stock or bond fund. Read the fine print in the fund prospectus, though, and you’ll see that the goal is to yield a positive return over a set period of time, which could be several years.

The holdings in most of these funds are usually some combination of bonds and stocks, although some hold derivatives and other complex investments. Other funds may use short-selling strategies to boost yields. The average investor could achieve similar or even better results at far lower cost, say some investment advisors, by allocating assets across a mix of low-cost stock and bond index funds.