The typical ‘Cautious’ investors are usually those nearing the age of retirement, but in times like these many of us revert to being decidedly risk averse. In these circumstances the obvious knee-jerk reaction may be to cash in all our equity investments and put them into a near zero-interest savings account, but research from fund data specialists Financial Express suggests that with careful fund selection investors can, to a great extent, protect their capital whilst remaining exposed to the equity markets.
It might be difficult to imagine a time when it would be desirable to have exposure to equities but there will be a point when the equity markets begin to pick up and we see a more sustained recovery than the short rallies of late. At this time investors will want to be moving out of their investments in fixed interest and cash and into the recovering equity market. The Cautious Managed sector offers investors the chance to be well positioned to benefit from the recovery.
A word of warning, however: many of the funds within the sector have been far from successful in their efforts to provide investors with capital growth. In the past 12 months New Star’s Managed Distribution fund, for example, performed worse than the FTSE All Share and lost over a third of its value.
Fund selection is crucial and the following table shows the top five funds from the IMA Cautious Managed sector, based on 1 year performance:
| Fund | Return over 1yr | Return on £1,000 |
|
8.04 |
1080.44 |
|
|
2.89 |
1028.88 |
|
|
-0.07 |
999.3 |
|
|
-4.8 |
952.01 |
|
|
-5.16 |
948.4 |
|
|
IMA Cautious Managed sector average |
-17.97 |
820.3 |
|
FTSE All Share |
-32.98 |
670.21 |
The stand-out funds from the IMA Cautious Managed sector are Ruffer’s Total Return and Neptune’s Cautious Managed which have both achieved positive returns over the past year. In addition, through clever asset allocation the funds from Barmac, Danske and Pru have been able to keep losses to a minimal level.
Ruffer’s Total Return fund is consistently in amongst the best performing funds in the sector and has performed particularly well in the last three months. The fund’s popularity has soared on the back of this performance and the fund size has increased by about 25 per cent since November 2008.
Fund manager David Ballance states: “Cautious Managed funds offer the investor exposure to a wide range of asset classes giving much needed diversification. We have the flexibility to choose how much is allocated to the different asset classes, depending on what our feelings are for the market at the time.”
Ballance and fellow manager Steve Russell took a cautious approach during 2008 with only about 30 per cent of the fund in equities. In the autumn of 2008 they took the decision to move from gilts into index linked bonds and buy more equities. Ballance believes that the success of the fund is due to the Ruffer approach – no matter how optimistic the fund managers are for a given asset class, the fund will always hold a diversified portfolio ensuring that money is made and losses are minimised should convictions be wrong.
Robin Geffen, manager of the Neptune Cautious Managed fund, has also managed to steer his fund through the turbulence of 2008, achieving a positive return for the one year period to the end of February. The fund was only launched in December 2007, so has had to prove itself in the worst economic conditions for a generation. Geffen has many years of experience and a proven track record managing a number of other funds at Neptune. Nevertheless, investors should always be cautious when investing in a young fund.
The flexibility afforded to fund managers within the Cautious Managed sector has enabled some funds to perform well whilse others have fared considerably less so. When equities are performing badly, the way in which the fund manager positions his fund is of key importance. Chris Burvill, manager of the Gartmore Cautious Managed fund, increased his exposure to gilts last year which ensured his fund was in the top quartile for the sector. He is now excited about the prospects for corporate bonds and is currently increasing his exposure to this asset so as to benefit in the coming months.
As investors wait to see whether the recent gains in the stockmarkets amount to anything more than a false dawn, the Cautious Managed sector offers the chance to gain exposure to any recovery in the equity market whilst benefiting from the safety of the bond and money markets. However, choices in asset allocation and stock selection can lead to wide variations in performance, so investors need to consider their fund choices carefully – sticking with experienced managers who have proven strategies should be the way forward for the cautious investor.