Our content this month are as follows:-

• In the News
• Old Habits Die Hard at Standard Life
• Books We Have Read
• Quote of the Month

Lots in the news this month to interest us, so let us take a few subjects in order.

Absolute Return Funds/Target Return Funds

One of the newer wheezes from the investment industry, designed to part investors from their money in the form of hidden charges. It all started with the DWS Ratebuster Fund launched back in 2003, promoted, like all of the others, as an alternative to Building Society accounts, promising capital security and an annual return of about 7.75%. We warned against it at the time and having hopelessly underperformed it was quickly killed.

Unfortunately this did not deter others like Baring, Scottish Widows and UBS, all of whom know a good thing when they see one, from rushing out their own products. All of these funds have been slated in the press recently, most notably by Paul Farrow in the Sunday Telegraph and Daniel Thomas in the Financial Times. As well as carrying very high management charges (Barings fund has an annual management charge of 1.75%) they all increase costs to investors by using derivatives, currency swaps and other complicated financial products to justify their existence. A recent study by Standard and Poor's of European absolute return funds revealed that none out of 21 achieved their target return after fees in 2006. Just to illustrate how bad they are here are the three-year (or since launch) returns for the funds mentioned above: -

Fund: Baring Directional Global Fund
Three Year Return: 2.22%
Target Return: LIBOR plus 4%

Fund: SW IP Absolute Return UK Equity
Three Year Return: 6.4%
Target Return: LIBOR plus 4%

Fund: UBS Absolute Return Bond
Three Year Return: 5.72%
Target Return: LIBOR plus 2%

As you can see the target return is a matter of fantasy and, as Paul Farrow said in Money Marketing on the 19th of July "I have always wondered why investors would bother with such funds." To which we might add - "Quite".

HEDGE FUNDS

Warren Buffett once said that it was possible to get rich in hedge funds, but only if you run one. Charges tend to be huge, with 2% with 20% profit share not untypical; having analysed the charges on the hedge funds of a well-known private bank we stopped when we got to 4.5% per annum. Given that these funds also go bust on a regular basis we wonder why private investors bother with them.

A senior figure at one of the largest accountancy firms in the UK tried to warn us a couple of years ago that hedge funds with all of their clever people and computer programs would soon destabilise markets. We took the view then and still do that markets are big hairy beasts that can look after themselves and recent events seem to confirm this. John Authers, writing in the Financial Times on 21st July notes that the collapse of Amaranth, one of the bigger US funds, "after it bet the house on the energy markets" was taken by the market in its stride. (Note carefully the use of the word "bet").

Bear Stearns are having well-documented problems with two of their own hedge funds who thought that a big "bet" on the sub prime mortgage market in the US would be rather fun. It probably is great fun to bet with other people's money. UBS chief executive Peter Wuffli recently lost his job after the in-house hedge fund, Dillon Read Capital Management was closed down following a $124 million loss having made what CNN Money called "bad bets in the US sub prime market". I wonder how many of UBS's customers knew they were betting when they invested and how many of them knew the kind of markets they were betting in.

Capital markets have survived and will survive events far worse than the implosion of hedge funds; given the rapid trading techniques and high fees of hedge funds the only losers are likely to be those who invest in them.

130/30 FUNDS

A variation on the hedge funds theme, these funds are being rolled out to gullible advisers as the Next Big Thing. In the last month Old Mutual, UBS and Threadneedle have wheeled them out. The way they work is that 30% of the value of the fund is risked in selling stocks short and the profits are added to the value of the fund. The only problem is that a human being has to decide which stocks will be shorted and we are back to "betting". These funds have no real track record but that will not stop the investment houses promoting them and financial advisers pushing them.

You will no doubt read some hype about them in the papers over the next few months along the lines of how successful the tactic has been for hedge funds. Ignore it.

As most of our clients know, we recommend 2 Wrap Platforms, James Hay and Transact. Both have transparent charges and we are happy that they add to the transparency of our offering to clients, as well as providing tax efficient wrappers for client investments.

Unfortunately most wrap platforms do not operate in the same way and as a result the Financial Services Authority has called upon them to "unbundle" their charges in the interests of greater customer understanding and transparency. Unbelievably, Standard Life have come out publicly against this. We can only suppose that all those years of selling policies with opaque charging structures make it difficult for them and their friends in the insurance world to change.

This month we are going to save you the trouble of reading a book, just in case you are tempted to order it yourself. Whilst it is funny in places we are pretty well convinced that this is not intentional.

The book is called "Fundology" and is written by John Chatfeild Roberts, who runs the Jupiter Merlin fund of funds operation. Interestingly there are some kind comments from three fund managers on the dust jacket and, surprise surprise, he is kind to them within the book. One interesting chapter is entitled "The truth about costs (and index funds)." He deals with index funds in about 2 1/2 pages by analysing the performance of a fund from Legal and General which carries an annual management charge of 2%. As a piece of intellectual dishonesty it would be hard to cap.

The book is only available by sending a coupon from one of the broadsheets and if you have any difficulty obtaining it you will be very fortunate.

"If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed."
Edmund Burke: Statesman, political theorist and philosopher.