Skip to Content
Fund Spy

Absolute Return Funds Fail the S.A.M.U.R.A.I. Test

Their benchmarks lack honor.

Mentioned: , , , , ,

Absolute returns are a popular goal among mutual funds, but investors considering these funds need a better benchmark. We’ve previously covered how funds that target positive returns have generally delivered on the absolute return promise over the past 10 years, but so have traditional asset-allocation funds. You can find that research here. In this piece, we’ll measure whether using “absolute returns” as a benchmark makes sense, by using what’s commonly referred to as the S.A.M.U.R.A.I test. This is a mnemonic device for seven criteria that a valid investment benchmark should meet.

First, a primer on the allure of absolute, or target, return funds. From an investor standpoint, focusing on a target returns makes sense if there are clear spending needs on the horizon. For example, imagine Sam and Rosie Gamgee, who want to fund their child's college education using their investment portfolio without dipping into the principal. With the help of their financial advisor, they decide that a portfolio return of 5% above inflation would meet that goal. In theory, an investment strategy that can provide a minimum return of inflation plus 5% annualized would be ideal.

Jason Kephart has a position in the following securities mentioned above: QSPIX. Find out about Morningstar’s editorial policies.