Target Return Funds

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. So the Target Return will be expressed as a straight percentage (e.g. 8%) as opposed to an actively managed fund which will usually express its target return as a percentage above a stockmarket index (e.g. 'FTSEAllShare + 2%)

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. 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.