The So-Called ‘Absolute Return’ of Mutual Funds

An Oct. 23 article by Investment News highlights the potential problems caused by mutual funds that tout the term “absolute return.” According to the article, the characterization does more than take the concept of marketing to new levels; it borders on outright misrepresentation and misleads both retail and sophisticated investors alike.

An absolute return mutual fund implies that the fund in question will produce positive returns each and every time, regardless of market volatility. And that just doesn’t happen.

About three dozen funds have adopted the absolute return term. At least a dozen of those funds were launched this year, according to the article.

Naming-convention guidelines outlined in the Investment Company Act of 1940 dictate that the word “guarantee” can’t be used when describing investment products. On the other hand, absolute return – which to the average person seems like a synonym for the word guarantee – apparently passes muster with the Securities and Exchange Commission (SEC).

“The SEC should have an issue with the term “absolute return,’ but they don’t,” said Geoff Bobroff, a mutual fund industry consultant, in the Oct. 23 Investment News article.

The bottom line: Investors need to take note. “Absolute return” is in no way an absolute guarantee of positive returns.