Aim: Growth by investing in a volatility strategy comprising global exposure to equities, bonds, commodities and property equities through index-based derivatives, and cash
Minimum investment: Lump sum £1,000
Investment split: 100% in derivatives and cash
Isa link: Yes
Charges: Initial up to 4%, annual up to 1%
Commission: Initial up to 4%, renewal up to 0.5%
Tel: 0845 680 7895
The RBS volatility controlled cautious managed fund is one of two funds that Royal Bank of Scotland has created to keep volatility within set parameters.
It aims to never exceed 10 per cent annual volatility and will invest in derivatives to provide exposure to a range of indices that represent asset classes including equities, bonds, property equities and commodities. The fund is underpinned by a volatility strategy where asset allocation moves towards cash and away from the indirect exposure to equities, bonds, property equities and commodities when the volatility looks likely to exceed the 10 per cent limit.
Discussing the ways in which this fund could be useful to IFAs and their clients, Michael Philips proprietor Michael Both says: “The Ucits III compliant volatility controlled cautious managed fund from RBS is designed to meet the needs of investors who take a cautious approach to investing.
“The fund looks to generate medium- to long-term returns while aiming to limit the risk, as measured by volatility, of the portfolio below 10 per cent. Its benchmark is the RBS Volatility Controlled Cautious Managed Strategy – so no danger of missing that. “
Both notes that the investment will be split between index-based derivatives and cash, which he feels should help keep costs reasonable.
“The FSA has recently criticised many cautious managed funds for being rather more volatile than investors expected and there is clearly a demand for funds which deliver a better return than cash without surprises. This one claims to address those needs.”
Turning to the potential drawbacks of the fund Both says: “The launch brochure suggests an improvement of a not insignificant 10 per cent over the last five years – an average of 2 per cent a year. But the simulated performance in the RBS brochure which compares the new fund’s hypothetical journey with the actual results of the IMA Cautious Managed Sector average show it under-performed for approximately four of the five years under review, but avoided the plunge between mid-2007 and early 2008 and that alone made the difference.”
Both points out that the brochure says the fund’s strategy is to use the historical performance of the assets held to identify when there are signs of a strongly rising trend ending and then to move into cash. “I’m going out on a limb here but without the benefit of hindsight I suspect they won’t know at the time when that is and are likely to guess wrong half the time,” says Both.
In Both’s view, the main competition is likely to come from CF Ruffer total return and Cazenove multi-manger diversity. “These funds have long and exemplary track records, both of which were used in RBS’s own comparisons. I’d avoid most other funds that claim similar novel strategies but which have yet to prove themselves with real money,” he says.
Summing up, Both says: “There is no shortage of funds promising the holy grail of decent returns with lower risk but few come close in practice. There is inevitably a trade-off between return and risk, while risk often correlates with volatility – hence it is extremely hard to deliver reduced volatility, reduced risk and decent returns all at the same time.
“Most managers who try rack-up dealing costs as they are whip-sawed in and out of markets which typically have no clear direction for most of the time. My suspicion is that if they have their asset mix sub-optimal their results in reality will not be as good as those hypothesised using back-fitted historical data. “
Both concludes that another danger is that by avoiding risk they will miss out on positive returns, which is unlikely to please all investors. “In my opinion, this fund one to watch rather than buy until proved in battle,” he says.
Suitability to market: Good
Investment strategy: Poor
Adviser remuneration: Average