As with-profits fell out of favour, investors flocked to the sector in the hope of safety and a reasonable level of return. There were only 24 funds in 2002 but there are now 111.
With the credit crunch almost a year old, investors could be forgiven for thinking this is the time when a cautious managed fund would come into its own but they would be wrong.
The past 12 months have seen less than one in eight funds produce a positive return, according to the Investment Management Association. Only 12 out of 102 funds have a positive track record lasting a year or more. The average fund in the IMA cautious managed sector is down by 5.7 per cent in the past 12 months compared with a 7.9 per cent fall in the active managed sector and 7.4 per cent in the balanced managed sector.
Some cautious funds have lost more than 15 per cent – losses that would place them near the bottom of the more aggressive active and balanced sectors.
Worst performer is New Star managed distribution, down by 16.9 per cent in the past 12 months, followed by Brunel distribution portfolio and New Star Tri-star, which have lost 16.4 and 15.8 per cent respectively.
Hargreaves Lansdown investment manager Ben Yearsley says the use of the word cautious is wrong as the funds traditionally offered a 60/40 split of bonds and equities.
He says: “Distribution would be a much better name for the sector as many investors would like an absolute return from their funds. Now the introduction of the absolute return sector may start to see money migrate across from investors, particularly with some struggling as much as they have.”
New Star managed distribution fund is a prime example. The fund is split 60/40 between bonds and equity income. The firm recently appointed Trevor Green to replace Toby Thompson on the UK equity income portion, with a huge revamp of that side of the portfolio set to follow.
A New Star spokesperson says: “It is important to realise we have done something about this. Bonds did not have a good year at the higher end of the credit risk spectrum but the outlook is improving. The problem really lay with that 40 per cent equity income exposure, which we have looked to do something about.”
Chelsea Financial Services managing director Darius McDermott says: “The figures reflect just how hard it is for IFAs who do not have constant access to fund managers to pick funds in what is a mixed bag of a sector. Numerous funds say they do the same thing but how they get there can be completely different with regard to exposure to different asset classes.”
Those that have tended to be successful in the cautious managed arena in the past 12 months have adopted a multi-asset approach to investing rather than sticking to the equities, bonds and cash guidelines.
BestInvest investment analyst Marcel Porcheron says: “We favour the multi-asset route and recently launched our own Oeics that follow that approach. It is hard to ignore alternatives like commodities and agriculture when they have performed like they have. If you stuck to equities, bonds and property in the past 12 months, you are bound to suffer.”
Informed Choice director Martin Bamford says: “There is too much to miss in terms of diversification if you do not make use of multi-asset. The oil price is a good example of that right now.”
The increased use of alternative asset classes saw the IMA alter the guidelines of the cautious managed sector in June 2007. It wanted to tackle the loosely worded definition which it believed encompassed a mixture of investment approaches.
Maximum equity exposure still stands at 60 per cent but a minimum of 30 per cent must now be in fixed income or cash. The IMA says the change ensures that at any time, a fund has sufficient liquidity and is both cautious and diversified.
Thames River co-head of multi-manager Gary Potter says these changes have helped in preventing many bending the rules by using the likes of convertible bonds within the fixed-interest component of the portfolio.
He says: “Fund returns could have ended up being worse, given what has happened in equities. It has to do with traditional areas like high-yield bonds, property and equity income all falling away on the back of the market troubles.”
Potter still believes the cautious managed sector is a good each-way bet. He says: “I see the cautious managed sector growing as investors shy away from equities in the likes of UK all companies as well as active and balanced funds. The sector is also unique in that it is not homogenous in the way it attracts returns. For example, fixed-income exposure ranges from 6 to 66 per cent across the funds in the sector. For me, it has the diversity to succeed.”