WEBVTT - What Are Absolute Return Funds And Should You Invest In Them?

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<v Speaker 1>com slash podcast offer. Welcome to Marrion Talks Your Money,

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<v Speaker 1>the personal finance edition of Marin Talks Money. In these

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<v Speaker 2>Are making the most of your money. I'm Maren sum Zep,

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<v Speaker 2>Web Editor at Large for Bloomberg. Okay Wealth and with

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<v Speaker 2>me senior reporter and author of the Money Distilled newsletter, John.

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<v Speaker 3>Steppek, John Hi mel.

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<v Speaker 1>Well.

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<v Speaker 2>More questions, more questions keep coming. We do love them,

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<v Speaker 2>and also they're often incredibly interesting because you know, listeners

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<v Speaker 2>often look at things from a slightly different angle to us.

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<v Speaker 2>If they're sending questions to make us go, oh yeah, all.

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<v Speaker 3>That, yes, intelligent questions. All we have some very high

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<v Speaker 3>quality a lesson and I have to see people we

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<v Speaker 3>good tease.

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<v Speaker 2>Well, we don't know that for sure, do we? We

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<v Speaker 2>know we have some good quality Listeners's other ones to

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<v Speaker 2>send the questions. Do we know anything about the rush?

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<v Speaker 2>But there are lots of you and we'd like there

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<v Speaker 2>to be more, so, you know, think about it sending

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<v Speaker 2>questions all good. This one is actually one that I

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<v Speaker 2>think is really interesting. We haven't talked about this for

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<v Speaker 2>a while and it's one of our bug bears of courses.

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<v Speaker 2>Is something that comes out of this. But here's the question.

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<v Speaker 2>The outlook seems quite gloomy from many of your podcasts. Yes,

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<v Speaker 2>I'm afraid. So we try to be optimistic, but you know,

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<v Speaker 2>times are tough. It's tempting to allocate much more heavily

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<v Speaker 2>to absolute return funds. Funds like are Going to Absolute

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<v Speaker 2>Return and akr Apex have been there in great returns

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<v Speaker 2>for a number of years now. In fact, we've had

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<v Speaker 2>Barry Norris of the album absolutely return on and that

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<v Speaker 2>has been going great guns and based on all the

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<v Speaker 2>doom and gloom I'm hearing about the global outlook, I'm

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<v Speaker 2>wondering why I'm invested in anything else. Fair absolute return

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<v Speaker 2>sounds rather nice yeat. Typically people don't invest more than

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<v Speaker 2>about twenty percent of their portfolio in such funds. What

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<v Speaker 2>factors should I consider when I'm thinking about allocating more?

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<v Speaker 2>Unusually like this, and this is from Tim right, Well,

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<v Speaker 2>the first thing to say is to try and explain

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<v Speaker 2>exactly what an absolute return is.

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<v Speaker 1>Right.

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<v Speaker 2>So, normally, when you look at a fund of any kind,

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<v Speaker 2>it will judge itself relative to an index. So you

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<v Speaker 2>will hear that a fund is outperformed even if it's

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<v Speaker 2>gone down ten percent. If the index to which it

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<v Speaker 2>benchmarks itself has gone down twelve or thirteen percent, they'll go, well,

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<v Speaker 2>look we are performed. And you'll look at it and

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<v Speaker 2>you'll goobal, but I have less money than I did before.

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<v Speaker 2>What do you mean you unperformed? But that's the way

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<v Speaker 2>the industry works. It's all relative benchmarking. It's not about

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<v Speaker 2>whether you managed to beat inflation. It's not about whether

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<v Speaker 2>you managed to have more money at the end of

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<v Speaker 2>the year than you did at the beginning of the year.

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<v Speaker 2>Is about how you did relative to an index or

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<v Speaker 2>relative to other funds. And that's actually quite irritating, isn't it.

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<v Speaker 3>Yeah, because for the retail investor, for us, for the

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<v Speaker 3>end user, we don't care. We basically would like earn

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<v Speaker 3>money to go up faster than inflation on a consistent basis,

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<v Speaker 3>so that when we come with a tire, we get

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<v Speaker 3>more money in real terms than we started by.

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<v Speaker 2>Yeah, that seems entirely fair. And if you give your

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<v Speaker 2>money to someone to take care of it seems entirely

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<v Speaker 2>reasonable that you should be able to say to them,

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<v Speaker 2>do you know whatever you want out of that? It

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<v Speaker 2>is to beat inflation. I want to be richer in

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<v Speaker 2>real terms, I inflation injusted terms at the end of

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<v Speaker 2>the year than I was at the beginning of the year,

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<v Speaker 2>or maybe not over one year, maybe over two years,

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<v Speaker 2>maybe over three years, maybe over five whatever it is.

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<v Speaker 1>That works for you.

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<v Speaker 2>But the whole idea should be not that I did

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<v Speaker 2>less badly than some other guy, but that you don't

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<v Speaker 2>make me poorer, that my capital is protected in real terms.

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<v Speaker 2>That seems like the apps absolute first priority of investing.

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<v Speaker 3>Yeah, I mean, certainly, I can see why it's not

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<v Speaker 3>like that. I can see why if you're if you're

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<v Speaker 3>told you're invested in a FUTSI one hundred based active fund,

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<v Speaker 3>then clearly doing a bit better than the Futzier one

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<v Speaker 3>hundred is actually all you can expect if does go

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<v Speaker 3>doing one. But it's just a preceding that deference, and

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<v Speaker 3>I'm not sure that people always do appreciate that. That's

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<v Speaker 3>how it works.

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<v Speaker 2>So that is what we're talking about about. Absolutely absolute

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<v Speaker 2>returns different to an ordinary fund. And then an absolute

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<v Speaker 2>return fund manager says to you, my aim is to

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<v Speaker 2>make sure that by the end of this year or

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<v Speaker 2>the end of a five year period or whatever the

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<v Speaker 2>period they're talking about is you have more money in

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<v Speaker 2>absolute terms, and my plan is to be inflation every year.

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<v Speaker 2>That's difficult, by the way, and a couple of decades ago,

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<v Speaker 2>I don't know if you remember that there used to

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<v Speaker 2>be an absolute return sector. You could say absolutely return

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<v Speaker 2>funds a little below that the Investment Association changed that

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<v Speaker 2>and started calling them target absolute return funds. To make

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<v Speaker 2>it clear that actually making more money than inflation every

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<v Speaker 2>year is really hard. It's really hard. So you can't

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<v Speaker 2>say that you will do it. You can only say

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<v Speaker 2>that you target it. But again, I mean, it's an

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<v Speaker 2>idea that I appreciate because as as I say, I

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<v Speaker 2>like the idea of someone saying, you know, I'm not

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<v Speaker 2>judging myself against other funds. I'm not judging myself against

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<v Speaker 2>an index. I'm judging myself against the real value of money.

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<v Speaker 3>Yeah, and it's the right aim, and it's absolutely what

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<v Speaker 3>to go for. I think the problem that you then

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<v Speaker 3>come to law from a fund selection point of view

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<v Speaker 3>is that the way that this rate has described the sector,

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<v Speaker 3>it is like, okay, I'm going to allocate twenty percent

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<v Speaker 3>of my fund, say two absolutely ton funds, And well,

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<v Speaker 3>I said, what does that mean? And in practice they

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<v Speaker 3>all do something different because because they're bench s mark

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<v Speaker 3>to making real returns, it doesn't matter how they go

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<v Speaker 3>about that. So they all go about it in different ways.

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<v Speaker 3>And so I mean, to be honest, they are probably

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<v Speaker 3>I am more akin to hedge funds than anything else.

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<v Speaker 3>That's what hedge funds basically do as well. They just

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<v Speaker 3>try and make money any way that they can. And

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<v Speaker 3>so I mean, the argonotic example is a really good

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<v Speaker 3>one because Barry's found is a very interesting fund, but

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<v Speaker 3>it's certainly not on the low risk end of the spectrum.

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<v Speaker 3>And he's invested in some pretty spicy stuff like Argentina

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<v Speaker 3>because that's where he sort of kind of money coming in.

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<v Speaker 3>Clearly he's been right about that, whereas others can absolutely

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<v Speaker 3>turn funds are maybe more tilted towards the kind of

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<v Speaker 3>gold bonds, slightly dull kind of stuff.

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<v Speaker 2>Well, I suppose you can end up. You can end

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<v Speaker 2>up with this very conservative, effectively and multi asset fante.

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<v Speaker 2>And there's that when you can just say, well, this

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<v Speaker 2>is the conservative ballast for my portfolio. It's not aiming

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<v Speaker 2>for relative anything. It's just I mean to keep going

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<v Speaker 2>giving me a couple of percentage points over inflation over

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<v Speaker 2>the long term, which of course was incredibly valible. But

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<v Speaker 2>that's like the Trojan fund, for example, a personal asset

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<v Speaker 2>in the investment trust world, which we've written about a

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<v Speaker 2>lot of the years, is the classic example of that,

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<v Speaker 2>and one that's really going to help you out as

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<v Speaker 2>good ballot in a bad market. Normally you're that kind

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<v Speaker 2>of thing. And then, as you said, at the other end,

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<v Speaker 2>you've got super spicy stuff. So there is no one

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<v Speaker 2>definition of an absolute return fund beyond the aim the

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<v Speaker 2>original name, which is not relative but absolute. There's nothing

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<v Speaker 2>more than that. So should you have absolute return funds

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<v Speaker 2>in your portfolio, well, sure, just be aware that this

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<v Speaker 2>is an incredibly diverse sector and you need to be

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<v Speaker 2>very clear on what it is that you want that

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<v Speaker 2>to do in your portfolio. Are you actually looking for

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<v Speaker 2>highly leveraged has fund light returns or are you looking

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<v Speaker 2>for a conservative ballot?

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<v Speaker 3>Yeah, and yeah, you do need to look at them.

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<v Speaker 3>And the other thing is again remember that just because

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<v Speaker 3>it promises an absolutely tone doesn't mean it's going to

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<v Speaker 3>macee it do it. Because I remember I was written

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<v Speaker 3>an article before we can there was something that was

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<v Speaker 3>a bit sexty slightly more than sexty ones in the sector,

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<v Speaker 3>and this was written last June, and about half of

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<v Speaker 3>them had nice to make every all the time over

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<v Speaker 3>the previous year, and then the game was a failed

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<v Speaker 3>into that's a lot better than the last time I

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<v Speaker 3>wrote this, because last time I wrote, there's only seven

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<v Speaker 3>of the funds in the sector that so me it

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<v Speaker 3>comes back to that point. It's like, okay, it's the

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<v Speaker 3>rate target, but it's very hard to do because if

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<v Speaker 3>it was easy you do, then help everybody who.

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<v Speaker 2>OK, there is no such thing as a gun inteed guaranteed,

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<v Speaker 2>absolutely return fund. All you can have is a target

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<v Speaker 2>to be an absolutely inspirational apperation everyone won't we all right?

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<v Speaker 2>I think that's about it all we can say on

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<v Speaker 2>absolutely return funds without getting too much into the ways

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<v Speaker 2>of individual funds, which we don't want to do right here.

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<v Speaker 2>Thanks for listening to this week's Maren Talks to Your Money.

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<v Speaker 2>If you like us show, rate, review, and subscribe wherever

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<v Speaker 2>you listen to podcasts. Also be shortful of meeting John

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<v Speaker 2>on extraor Twitter at Mariners w and John Underscore Step.

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<v Speaker 2>This episode was produced by Samasai and Moses and Question.

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<v Speaker 2>The comments on this show and all our shows are

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<v Speaker 2>always welcome. Thank you Tim for yours. Our show email

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<v Speaker 2>is merin Money at Bloomberg dot net.