Chelsea Financial Services recently published the "DropZone": the 10 funds that have underperformed their sector by the most over the past three years. Four of these – The Castleton Growth, Neptune Cautious Managed, F&C Blue Acc, Insight Diversified High Income – sit in the IMA 20-60% Shares sector, formerly IMA Cautious Managed.
At the time, Chelsea’s Darius McDermott said it was frightening that so many of the underperformers came from one sector, adding: "That a sector of funds deemed to be of limited risk can underperform by such a huge amount is simply unacceptable."
According to FE Analytics, the average fund in the sector lost 2.12 per cent last year.
Shortly after Chelsea published the DropZone list, however, Cofunds released data showing that four of the 10 top-selling funds in January sit in the IMA 20-60% Shares sector, with a spokeswoman saying "Cautious Managed’s staggering intake in January was the highest it has seen".
The performance of these four funds has been much more respectable, with the best, Premier Multi Asset Distribution, returning 51.35 per cent over three years, while even the worst, Cazenove Multi Manager Diversity, still managed 34.64 per cent.
Performance of funds vs sector over 3-yrs
Source: FE Analytics
IFAs, however, remain unconvinced by the sector. Kerry Nelson, director of Nexus IFA, said she was unsurprised by both its popularity and poor performance.
"This is quite a lazy sector, it has a lot of funds run by retail banks and a lot of people get stuck in it," she said. "You have to really go out of your way to find any decent funds at all."
"Some people lazily think 'I’ll have one cautious fund in my portfolio' but it’s much better to build up a bespoke cautious portfolio yourself."
"Although the sector has been tweaked recently, you would naturally assume these funds have a cautious outlook, but in terms of volatility, many of the funds in this sector are as risky as pure equity funds."
"These funds aren’t expected to shoot the lights out, but it is about delivering consistent returns and you do expect them to at least beat cash."
McDermott added: "Our criticism of the sector is that it doesn’t provide an indication of what equities are being invested in and the level of volatility you are taking on."
"You can have 60 per cent in equities. So of two managers in the sector, one could be invested in large caps like Pfizer while the other one could have everything in Japanese smaller companies. The name change is a step in the right direction but it is far from perfect."