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Adviser Fund Index

Just what does the cautious in cautious managed funds mean? The financial turmoil of recent years has posed this question acutely. Although the name suggests low risk, many such funds suffered sharp falls in value as markets tumbled.

The answer depends partly on whether fund performance is measured in relative or absolute terms. It is quite possible to experience a large absolute fall but still outperform many other funds. Many cautious funds lost as much as 16 per cent during the crisis but American and European markets tumbled by about half.

Cautious managed funds can have up to 60 per cent invested in equities and balanced funds can have up to 85 per cent. With funds so highly invested in plummeting equity markets, they suffered poor performance almost by default.

Chelsea Financial Services managing director and AFI panellist Darius McDermott says cautious funds should not be involved with “risky asset classes”.

He says: “Our cautious portfolio is filled with funds that do a specific job. When the market goes down 20 per cent or more, we want funds that do not fall during these times.”

Chelsea Financial’s cautious managed portfolio includes the First State Asia Pac-ific and Miton special situations funds.

McDermott also sees absolute return funds playing a useful role in cautious portfolios. For this purpose he uses Gartmore UK absolute return, managed by Ben Wallace, which has recently merged into Henderson’s line-up.

Absolute ret-urn funds do not usually participate in the rise and fall of equity markets, with most managers in this sector favouring a strategy that avoids volatil-ity while producing returns that are greater than zero.

The Investment Management Association decided to conduct a review of its managed fund sectors. The results of this review and any changes to be implemented will be announced at the end of 2011.

The FSA also took action. In January 2011, it fined Barclays £7.7m for misselling funds labelled cautious and balanced. Afterwards, the firm made an apology. It admitted investors were “exposed to more risk than they were comfortable with”, adding that “some were adversely affected”.

But the popularity of cautious managed funds has not dwindled. With equity markets still fluctuating owing to events such as unrest in the Middle East and the earthquake in Japan, investors are still looking for stability.

AFH Independent Financial Services head of investment research Graham Toone is more focused on the risk of inflation than tumbling markets.

He says: “We are using the M&G UK inflation-linked corporate bond fund, which we believe provides cautious investors with security at the moment.

“We are not at all convinced that inflation will come down. This fund provides index-linked exposure and we think it is a safe haven in this environment.”


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