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Bad hare days

Given the state of global stockmarkets, I suspect that most people would have settled for investing in a cautious fund over the last year or so. The only problem is that the definition of a cautious fund varies enormously.

For example, many cautious funds have 40 to 60 per cent in equities, with the rest in fixed interest. This will protect you to some degree from a market downturn but it will not prevent you from losing money.

The trouble with these types of funds is that, by and large, two asset classes are not sufficient to protect the fund against a big downturn. You really need more of a multiasset fund from the likes of Miton and Ruffer or possibly the new breed of cash-plus funds such as JPM cautious total return, the fund I am looking at this week.

I think the problem that many intermediaries have faced with these types of funds is the fact that most of them are quite new. In other words, we have not seen how they performed over a really difficult market cycle. Still, we cannot say that now.

They also suffer from the same old investor psychology of greed and fear. When investors are greedy, they want the best total returns. These do not come from this type of fund. On the other hand, when they become fearful, they tend to dive for cash, distrusting anything else.

However, the way to look at these types of funds is to consider them as genuinely long-term investments which act more like tortoises to the aggressive fund hares.

The JPM fund was taken over by Neil Nuttall, chief investment officer and head of global multi assets, from Miles Gerard in May 2006. Of course, it was unfortunate for JPM to lose Gerard as I believe fund manager continuity is important, particularly in funds like this. However, this takes nothing away from Nuttall, who has continued to do an excellent job and is passionate about the fund.

Conditions have not always been favourable for this type of fund, particularly because the yield curves on bonds were not favourable in terms of beating cash. The fund aims to deliver cash plus 3 per cent after fees using the one-month Libor. That in itself has not been helpful as Libor has ballooned over the last six months.

There may be times when the fund returns are negative but Nuttall looks to minimise the downside as much as possible. The aim is to make money for investors over a full cycle which is usually between three to five years.

The fund uses a combination of top-down and bottom-up investing, first deciding which asset classes and regions look best and then deciding which investments and asset types to hold.

The fund does use convertibles and also looks to use futures. It is currently overweight in bonds, with a cash weighting of around 47 per cent.

This is a well diversified portfolio with 124 holdings. Equity accounts for almost 20 per cent but the individual equity positions are quite small in a deliberate attempt to reduce stock-specific risk, especially in these volatile markets.

The fund has a huge amount of flexibility and is able to invest 100 per cent in cash. A maximum of 40 per cent can be invested in equities, with a maximum of 50 per cent in convertible bonds. Convertibles are used for their equity characteristics but with lower volatility.

Last year, the fund produced a return just over 7 per cent, not beating its benchmark but not a bad performance given the incredibly volatile year we have seen.

As many of you know, it is hard to convince clients to use this type of fund. In a bear market, clients seldom want to talk about anything but cash. However, this type of fund can be used tactically to consolidate gains and particularly to derisk portfolios, such as self-invested personal pensions, close to when investors might need the money.

On the other hand, if these funds can grind out returns of around 8 per cent or so a year, they could prove their weight as a core holding with satellite, long-only funds grouped around them.

It will be interesting to see how the fund plays out during 2008.

Mark Dampier is head of research at Hargreaves Lansdown


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