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New name, same old problems

The IMA mixed investment 20-60 per cent shares sector, formerly cautious managed, has bounced back after a torrid time over the past few years. Yet the spread of returns suggests there still remains a lack of homogeneity within the sector.

Over the past three years, the average return of the 239 funds in the sector was 34.79 per cent. The top performer, the Henderson managed distribution fund, returned 79.40 per cent while the Barmac Castleton growth fund lost 10.68 per cent at the bottom of the sector.

There is a similar trend over five years, with the top five funds recording an average excess return of more than 400 basis points above the bottom five portfolios.

These spreads should indicate the varying degrees of risk carried by individual products within the sector. It also suggests that comparing a fund directly to its sector benchmark may offer little insight into the relative success or failure of its investment strategy.

Yet there is an important difficulty posed by this. The sector classifications are designed to give investors the ability to judge a fund against its peer group but if it instead obscures the picture, perhaps a more rigid classification is called for.

Stark underperformance is no doubt cause for concern but how pleased should investors in a lower-risk investment product be with returns far in excess of their benchmarks?

Over five years to March 27, the top-three performing retail-focused funds, Axa global distribution, CF Ruffer total return and Threadneedle navigator balanced managed, have produced returns of more than 60 per cent. In contrast, the FTSE All Share has returned 11.55 per cent over the same period while the MSCI World Index has returned 19.67 per cent, according to FE.

Although none of the top performers are among the sector’s most volatile funds over the longer timeframe, CF Aesculus, Henderson managed distribution and S&W charity value and income feature in both top fives over three years. There is also a slight correlation between lower returns and low volatility.

Whitechurch Securities head of research and AFI panellist Ben Willis says: “The new name does help define it better than cautious managed but it is not a complete solution. There is still a huge variety of funds within the sector. If you asked the average investor what they wanted from one of these funds, they probably would not say high volatility and high returns.”

For advisers, the difficulty is how best to compare the funds within the sector. Long-term underperformers are routinely screened out but perhaps, in this case, it is just as important to filter some of the stellar performers so that client appetite for risk can be matched with fund performance. The change of name is only the start of much-needed additional scrutiny of the sector grouping.

Data supplied by FE



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