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Don’t write off America

Following on from my comments about the Platform Conference organised by Cofunds last week, I was interested to receive details of which funds were proving most popular among its users.

The figures produced for the third quarter showed the cautious managed sector to be holding on to its top spot, with just a modest decline from 32 per cent of net sales in the second quarter to 30 per cent.

With only one other sector creeping into double figures – sterling strategic bond funds with 10.2 per cent – it is clear that advisers are taking the cautious option seriously.

Whether this is wise is questionable. The variation in performance among cautious managed funds is a reflection of the widely drawn guidelines. No wonder the IMA has been considering introducing a new sub-sector in this area.

But contrast that with figures published by the Investment Management Association and you realise other investors are being less cautious. During the quarter ending on September 30, bond funds were the clear winners, with global bonds leading in September and July and sterling corporate in August.

True, cautious managed did succeed in topping the charts in June, but that was the only month they did.

Fears have been expressed that a bubble in bonds might be developing. In the end, it is what might happen to inflation and thus interest rates that will count most.

However, I do find the way in which private investors express their views on likely outcomes through their preferences in the funds market a little worrying.

For example, earlier during the year, when markets wobbled, absolute return funds led the field for three months and property for another three, according to the IMA. Neither sector guarantees protection from the return of difficult conditions.

Interestingly, the worst-selling sectors in net retail terms recently have been UK all companies and North America.

The US, which really is what North American funds are mainly about, does provide something of a conundrum. On the one hand, they have a massive deficit problem, a consumer sector that is still overborrowed and a weak currency. On the other, they remain the world’s biggest economy, are heavily self sufficient and enjoy a better demographic than China, Japan and much of Europe.

Investors have been caught out in the past when they have ignored America. It is a resilient nation with a strong work ethic and has led on technology for some time. In much of the 1990s, British investors eschewed the US in favour of the Far East but by the end of the decade it had been proved that America had been the place to invest.

Life became much tougher as the new millennium dawned but writing off this bastion of capitalism could prove to be a mistake once again.

So where is North America in the Cofunds table? Not quite as far down the list as the IMA figures might suggest. Ranking 11th out of 17 sectors listed, they do account for a little over 3 per cent of net sales – around one-tenth of that of cautious managed.

But at least they are in positive territory. Two sectors shrank during the quarter – Europe ex UK, was down by1.9 per cent and money market funds were 2.4 per cent lower.

While low interest rates will doubtless influence this, when the public is turning away from cash it must be time to be really cautious.

Brian Tora is a consultant to investment managers, JM Finn & Co


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