Is Anything Absolute?
This question occurs as we develop a marketing and sales approach to investment vehicles labeled “to seek absolute returns of …” There’s a desire for investment providers to sell absolute returns, but I don’t know if there’s an interest in thinking in absolute terms. Putnam has a set of videos that describe the absolute return mechanics. They even produce an engaging blog dedicated to absolute return as well. Does any of this content (or other) convince you to use absolute return investment products?
Humor me and imagine two scenarios –
Scenario 1 – FundCo’s Absolute Return had a 2% return in ’08.
Scenario 2 – OtherCo’s Absolute Return did 20% last year (’10)
In casual conversation among non-professional investors, mismatching years like this is pretty common. If someone told you about both scenarios, where would be the first place you would go to compare these past results? If you’re like me, you may use Google finance to understand that FundCo was 39 percentage points better than the S&P in ’08, while OtherCo was about 10 better than the S&P in ’10.
My thinking is relative, not absolute. I understand that these manufacturers are striving to produce a return regardless the direction of financial markets. That’s a difficult frame of reference to set with prospective investors. Professional investors provided with different funds’ returns for the same year typically look at each fund relative a relevant benchmark.
So while I haven’t seen anything compelling yet, I realize we’re still in the first act for absolute return products. There’s a long way before the show is over. Yet thus far, it’s not been very convincing.