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Absolute Return Funds Offer Investment Alternative, but Approach with Caution

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It is no secret that healthcare expenses will have a compelling impact on the quality of life of all Baby Boomers in retirement, and many believe that costs will eventually swell beyond their control.

“The assumption on expenses is accurate; however, a safe and secure investment now can create a reservoir that can be tapped when unforeseen healthcare expenses arise down the road,” advises Ron Mastrogiovanni, CEO of HealthView Services and one of the founders of FundQuest.

Unlike traditional mutual funds, a new, innovative investment vehicle called absolute return funds provide investors with steady, stable returns in both bull and bear markets.  Given the current instability in global markets, there is ostensibly a demand for a mutual fund designed to limit losses while achieving an intended return over inflation.

Established in late 2008, absolute return funds have been structured so that fund managers can strategically migrate from one asset class to another.

They’ve also generated their fair share of controversy, as some suggest that any product that appears to be too good to be true may indeed be … well, too good to be true.

Mastrogiovanni offers this example:  In a down market, a manager of a conventional equity growth fund must consistently comply with a prospectus that requires the fund manager to maintain a portfolio of equity growth securities.

The absolute return fund managers can, in a strategy similar to what hedge fund managers employ, move into any asset class, including domestic fixed income, emerging markets, REITS, and short term commercial paper, all designed to protect principal while achieving a targeted rate of return.

Absolute return funds are now being offered to investors by Eaton Vance, J. P. Morgan Chase, and Putnam Investments, with Putnam currently leading the way. Putnam CEO, Bob Reynolds, has said that: “Putnam has taken an investment concept that has worked for institutional and high net worth investors, and brought it to the retail investor.” 

The fund company currently offers four absolute return fund choices with the clear benefit that they do not target performance based on traditional investment benchmarks, such as the S&P 500. Instead, the objective is to target a return in excess of Treasury bills, with a more conservative product targeting a 1% return over Treasury bills and a more aggressive fund targeting a return of 7% over Treasury bills. Accordingly, the absolute return funds could actually be up in a down market year.

“Absolute return funds are not only attractive core products for Boomers to hold in their portfolios during this volatile market, but viable long-term options to prepare for inevitable out-of-pocket healthcare expenses,” says Mastrogiovanni.

Ultimately, an absolute return strategy featuring a low correlation to equity and limited downside volatility leads to a consistent return that is critically important to pre-retirees and retirees alike. This innovative approach may provide Boomers with some peace of mind in regards to addressing rising healthcare costs in retirement.