Sector Focus: Cautious Managed

Cautious Managed funds are a staple for many an investor: restricted to an equity cap of 60 per cent and required to hold at least 30 per cent in fixed interest and cash, the vehicles are seen as a way of getting a tidy income along with steady growth.

The sector has come under fire, though, and is subject to an Investment Management Association (IMA) inquiry along with the other managed sectors, after advisers and consumer groups said the title "Cautious" was misleading.

The body had suggested a seemingly superfluous name change for the Managed sectors, but fund managers have forced the IMA to hold off on any decisions for now, saying consumer testing would be needed before such a sweeping rebrand.


Key Funds

Invesco Perpetual European High Income is one of the best-performing funds in the sector over the short- and medium-term: over one and three years it has returned 17.04 per cent and 31.73 per cent respectively, compared with 8.78 per cent and 13.08 per cent from the sector average.

The payoff for that return is the volatility. While the average fund in the sector took on 4.7 per cent of risk, Invesco’s fund weighs in with 12.56 per cent.

Run by Paul Causer and Paul Read, with the recent addition of Stephanie Butcher, the £11.4m fund holds 45 per cent in equities, just over 5 per cent in the money market, and the remainder in bonds.

Another fund worth a look is CF Ruffer Total Return. Its long-term performance is impressive, returning just under 50 per cent over the past three years, and 60 per cent over five years at an average volatility. The past 12 months haven’t been as strong for the vehicle, though: it has returned just 6.6 per cent.


Risks and considerations

As alluded to above, the Cautious Managed sector isn’t as risk-free an investment as the name might imply. In the two years to January 2009, all but six funds lost money. Some lost as much as 40.89 per cent in the period.

The peculiar and sometimes arbitrary asset allocation caps put on a manager can also be restrictive. Earlier this year, FE Trustnet reported that managers were ignoring the IMA sector classification guidelines because they found them too restrictive.

Cautious Managed sits alongside the Active and Balanced Managed sectors as a choice for investors who want to limit the risk in their portfolio.

Offering a similar idea is the controversial IMA Absolute Return sector, which is supposed to offer funds that will deliver an absolute – or more than zero – return to investors. These sorts of funds can be expected to underperform in times of high growth, but should return capital if the market falls.

In reality, many vehicles have come under fire for taking on too much risk and losing money in downwards-moving markets.


Our view

The inclusion of a fund in IMA Cautious Managed is not a guarantee against losing money.

It is also worth keeping in mind that, while low risk sounds good in uncertain times such as these, investors will miss out when markets rocket because of the sector’s limited exposure to equities.