Investigating the Cautious Managed sector
During uncertain times investors will understandably be anxious about losing money. After all, conditions in which stockmarkets rise sharply then plunge dramatically are far from ideal for those wanting to sleep soundly.
This may explain the remarkable enthusiasm for IMA Cautious Managed which became the best-selling sector in the second quarter of this year, according to the Investment Management Association (IMA).
There is now £16.9 billion invested in this area of the market – equating to around 3.3% of the £530 billion total funds under management – with £121 million of fresh money ploughed in during July alone.
Geoff Penrice, an independent financial adviser at Honister Partners, is not surprised. He believes many people have become very risk-averse in the wake of the financial crisis.
"Very low interest rates mean investors are getting a return well below inflation and are looking for alternatives to cash deposits," he says. "They are also nervous because of the high level of volatility in the markets over the last few years."
But have they been right to put money into the Cautious Managed sector? Has it made sense to be in areas that are apparently less gung-ho, or have they been left ruing the decision not to put their money into fast-moving sectors such as Global Emerging Markets?
The overall performance of the sector can best be described as middle of the road over just about any time frame. For example, over the past three years the average fund has made 3.2%, according to Morningstar (20 September 2010).
Although this is significantly better than IMA Property, which has lost 24.49% over the same period, and 11 other sectors mired in negative territory, it trails far behind sectors which have capitalised on recent opportunities.
IMA Global Emerging Markets is up almost 21%, and another 13 sectors have made it into double figures, including IMA Technology & Telecommunications (16.65%) and IMA £ High Yield (16.37%).
Objective of the sector
However, such performance figures are not unexpected in the managed sector.
The objective of managed funds in the Cautious Managed, Balanced Managed and Active Managed sectors is to blend a range of different investments in order to create a core holding for an investor's portfolio.
Which sector and fund is chosen will depend on an individual's risk appetite and financial goals, says Mark Dampier, head of research at Hargreaves Lansdown. They can then buy other funds to either add or reduce risk on the edges of their portfolio.
"Active Managed funds tend to be the highest risk, with cautious managed funds for more risk-averse investors," he says. "Balanced and cautious managed funds will usually invest in a mixture of shares and bonds."
Therefore, investors in cautious managed funds will not enjoy the best possible returns when markets soar, because they have some assets in fixed income. Conversely, during troubled times their make-up should help protect against major losses.
The different approaches employed are reflected in the varying performance of individual funds within the sector.
Over the past year to mid-September, the star has been the Henderson Managed Distribution fund, which has returned 17.14%, according to Morningstar. The CF Castleton Growth fund, meanwhile, is down 7.24%.
The five-year figures show an even greater divide. While the CFRuffer Total Return fund has returned a solid 61.08%, the Aberdeen Multi-Manager Multi-Asset Distribution fund has lost 8.61%.
So why is there so much difference between the best and worst performers in the sector? The principle reason lies in the definition laid down by the IMA; it illustrates the dangers investors face by wrongly presuming funds in the same sector will operate in a similar way.
Funds in the Cautious Managed sector have a maximum equity exposure of 60%, while at least 30% must be held in fixed interest and cash – and therein lies the problem, according to Patrick Connolly, spokesperson for AWD Chase de Vere.
"While a certain amount of every fund must be in fixed interest, there is a wide variation between funds in where they can and do invest," he says. "Some funds invest in just shares and fixed interest, while other use a wide range of asset classes."
It means that one cautious managed fund is not necessarily similar to another. As there are no minimum equity weightings, a manager can effectively have anything from zero to 60% exposure to the stockmarket.
That is why it is so important for investors to carry out in-depth analysis on funds in this sector before committing their money, points out Andy Gadd, head of research at Lighthouse Group.
"The conclusion is that just using a sector classification as a filter when selecting funds isn't good enough," he says. "It must be remembered that cautious managed funds are about reducing volatility relative to equities through diversification."
Any attempt to break the sector into manageable chunks should maybe start with dividing it broadly into two areas: Funds following a multi-manager brief and those that buy into individual assets.
At this point it depends very much on what each individual investor wants to achieve, so make sure you pick a fund with the right mix of assets – do you want a fund that's investing the full 60 per cent in equities or one that has less exposure to the stockmarket?
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Active managed funds
These funds try to produce returns superior to a “benchmark index” such as the FTSE 100 by a combination of picking the right stock at the right price at the right time. A fund manager calls the shots and tries to outperform the index. “Passive” or “index tracking” funds just try to match the index as closely as possible and are managed by computer.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).