Absolute return funds for consistent results
AIDAN BAILEY analyses UK interest rate predictions and predicts the class of funds to select for consistent returns.
With the recent talk of double-dip recessions, Japan-style deflation and the high possibility of further quantitative easing – such as money printing – the general consensus is the UK base rate, currently standing at 0.5 percent, will remain low a bit longer. But there are conflicting reports. While Ernst & Young ITEM Club reports low levels could last until 2014, research conducted by a Policy Exchange think tank suggests the possibility of base rates at eight percent and inflation at 10 percent within the next two years.
Personally, I think that’s very unlikely as the economy is still weak but the theory is after a brief double dip recession in early 2011, recovery will gain traction and together with the Government’s current measures, stave off a recession. £200bn of Quantative Easing will lead to an explosion in money supply, resulting in inflation. The Consumer Prices Index (CPI) – an inflation measure the Bank is responsible for maintaining at approximately two percent – could also increase to six percent. So to keep a lid on inflation, interest rates may indeed need to rise to eight percent.
Such differences in opinions are becoming increasingly common. Unless you strongly agree with either view, I’d highly recommend “absolute return” funds. Traditional equity funds are similar to Formula 1 cars – they perform best on a smooth and straight road, but falter on uneven ground. An absolute return fund is akin to a rally car – flexible and skillful enough to perform well both on tarmac and off-road. So no matter what type of road you find yourself on, an absolute return fund promises you a smooth and safe ride.
The below image illustrates a relatively consistent return is possible, by maintaining a diversified spread of assets and holding only those you believe will be profitable – no matter what comes your way.
Aidan BaileyBA (Hons) CertPFS AWPCM
General Manager Singapore, International Division
