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| It's the marketing, stupid...... |
What are they?
Target Return Funds (TRFs) are not a brilliant
new investment concept, just clever marketing.
They are also called 'Absolute Return Funds'.
All funds have an investment objective. A TRF is a
fund that expresses this objective as a target return. Usually (as
the alternative name of 'Absolute Return' implies) a TRF aims to
make money independent of the direction of the stock market. For
example, one current TRF aims to return "base rate + 3%".
With base rate currently at 4.5%, that's equivalent to 7.5% per
annum.
First trap
Because a fund "targets" a particular return does not mean that
it's going to make it. And because a fund has the phrase "target
return" in its title does not make it any more likely to make that
return than one that hasn't. A "target" is not a guarantee.
The key is risk and return. If you want high returns
you must take high risk. So a fund that tells you it is targeting
8% (for example) is telling you that it will be taking more risks
with your money than a fund that is targeting 7%. It is not a "better"
fund. Just riskier.
Second trap
This one is really quite naughty. The target return is often quoted
before management fees (at least 1.25% in all the funds we have
seen) and all the usual other costs. So even if the fund hits its
target, that's not what you will get.
And the target return is often quoted before tax as
well.
As always, ask yourself whether the return you expect
from the fund, after all costs, justifies the risks being
taken with your money. For us, we wonder whether funds prepared
to be this economical with the truth should be entrusted with our
money.
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