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The similarities between this sector and the Balanced Managed sector are apparent through the IMA’s sector definition with the
Cautious Managed sector possessing a few more restrictions in order to deem its constituents as being ‘safer’ investments.
The IMA restrict these funds to include a maximum equity exposure of up to 60%, coupled with at least 30% invested in fixed
interest and cash. Cautious managed portfolios are effectively tailored to include an allocation between stocks and bonds that are
designed to provide both income and capital appreciation while avoiding excessive risk. They should be held over the longer term,
with a five year view, and are aimed at highly risk averse investors seeking capital preservation, with an exposure to bonds and
equities in order generate returns above simply holding cash.
Financial Express Analytics shows that 118
funds exist within this sector as at August 2008. Of these funds, only 72 display a history of 3 years or greater, highlighting the
relatively recent launches in this sector. It is also worth noting that over this 3 year period all but six funds made a positive gain,
with the worst fund posting a loss of 6.5%. Nevertheless this is somewhat of an outlier, given that the average fund over this period
returned 6.5%. In addition 14 funds out performed the FTSE 100’s 12.42% over the 3 year period, with the top performer posting a
first-rate 23.2% gain - Not a bad result given the relatively lower risk nature of these funds.
Given the
market turmoil experienced over the last year many have looked towards this sector as a safe haven for their cash, in-light of the
cautious nature employed to investments. This sector therefore has increased in popularity over the year, which has sparked
greater launches in funds within this space, with its prominence revolving around its objectives of low risk capital preservation.
The sector can therefore be scrutinised effectively over the past year in which it has dissappointed, since only 9 funds
managed to make any gains over the year. This is not a result that investors would have been after, given the mandate of these
funds to remain cautious and preserve capital. Furthermore we see that an unlucky 13 funds posted losses greater than the
FTSE 100’s 11.1% over the period, with the biggest loss maker posting -18.5% over this period - Not a very cautious result.
In taking a stronger glance at those funds that have done well, it is clear to see two funds leading the way.
Both are vehicles from Capita Financial Managers; their Arch Cru Investment Portfolio and
Arch Cru Income fund, returning 7.7% and 7.1% respectively, over the year to
August 2008.
By addressing trends in the overall sector holdings, it is evident that fixed income has begun
to feature more prominently, reflected by a current weighting towards fixed income securities of 37.3% for the average fund.
Comparing this to UK equities current average weighting of 32%, a clear shift to fixed income securities is apparent given that this
balance historically has been tended more towards equities.
The risks taken by the constituent funds have
nevertheless been as we expect, with every fund displaying a lower 1 year volatility to last month end (July 2008), than the FTSE
100’s 15.6%. The sector average volatility was 7%, and notable risk measures were reflected by our two least risky funds. These
funds were once again Capita’s Arch Cru Investment portfolio and Arch Cru Income fund - posting annual volatility figures
of 0.5% and 1.3% respectively. Any investor fortunate enough to have been exposed to either of these funds over the last year would
have clearly enjoyed their risk-return combinations.
Given these sterling results it is worth probing into
these funds in more depth to see where this value has been created. The first noticeable statistic is that both funds maintain very low
R-squared figures to
the sector average, both less than 0.1, meaning that they have prospered by fraying away from the typical investments of other
constituents. It must also be noted that both these funds in fact were lagging the sector average until the credit crunch hit in July
last year, after which they where the only two funds to have consistently continued to rise, despite markets having dropped -
this is further reflected by the Arch Cru Income fund possessing a three Crowns rating.
It is clear from the
holdings that both funds hold the same securities, which amount to a total of five - highlighting extremely concentrated
portfolios. Furthermore all of these holdings are provided by Arch Cru themselves, with the highest weighting towards Arch Cru
Private Finance, which is 53% of the Income fund and 36% of the Investment portfolio. We also notice that the Investment portfolio
holds a more equal spread between these five assets, and thus the ultimate decision for investors wanting to get involved in these
funds is a basic decision of choosing which asset allocation between the five securities they prefer. Another difference to help choose
between the two is that the Investment portfolio has only been around for 2 years, whereas the Income fund has been in existence
for 5 years, and that although the Investment portfolio has done slightly better, it does charge an initial fee of 10%, which is almost
double that of the Income fund’s 5.25%. For these reasons new investors may prefer to opt for the more mature and relatively
low-cost Income fund.
Overall as market sentiment remains cautious, this sector should remain a popular
theme for investors seeking capital preservation. As a recession becomes ever more imminent, the consensus should therefore
remain to keep probing into such funds to uncover those that are truly cautious and promising their intentions of taking low
risks and offering a better return than simply holding cash. Given that our data has uncovered two clear outliers in performance
within this sector, those investors seeking to prosper in this space may be best placed to flip a coin between asset allocations in the
Arch Cru vehicles, as they have proven themselves to be safe investments over the increasingly volatile months seen during the past
year.
*Source of data:
Financial Express Analytics
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in association with
Cautious Managed
GART
Funds in this sector: 2
IMA definition of sector
Funds which offer investment in a range of assets, with the maximum equity exposure restricted to 60% of the Fund. There would be no specific requirement to hold a minimum % non-UK equity. Assets must be at least 50% in Sterling/Euro and equities are deemed to include convertibles.
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