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Time is right for caution

“Great men wait for the right moment to abandon caution. The rest of us abandon it when impatience becomes too much for us.” – Cooley Mason, 1985.

With growth on the FTSE 100 of over 17 per cent in 2003, it would be easy to throw caution to the wind and jump straight back on the equities rollercoaster.

However, it is key that everyone should, as part of a balanced approach to investing, hold cautious lower-risk investments as a core part of their portfolio.

The result is an ever-present portion of an investment portfolio that offers the stability on which to build other, perhaps more adventurous investment choices.

This cautious core could possibly consist of one or more of the following:

•A ready-made cautious portfolio.

•A cash fund.

•A defensive or cautious managed fund.

•A lower-risk single asset class fund.

A ready-made cautious portfolio. This is generally a mix of different asset classes – gilts, corporate bonds and property – that together produce an overall portfolio that can be classified as cautious in nature. By limiting this portfolio to only sterling-based assets, risk could be reduced even further.

However, building the portfolio is just the starting point – it needs to be reviewed regularly to ensure that it continues to meet the client&#39s original objective and risk profile.

This can now be achieved simply and speedily by setting up the portfolio to rebalance automatically to its original fund split each year – this ensures that the original objective and relative risk remains true.

Cash fund. They currently offer relatively low rates of return but this is the price you pay for their high level of security. The rates of return may increase slightly if interest rates continue their recent rises. However, real rates of return are expected to remain low.

Cash funds may prove attractive if they are utilised as a base from which to dripfeed the investment or any growth into a range of unit-linked funds over a period of time. This approach could have the twin advantages of lessening any timing risk or ensuring a high degree of capital security.

Defensive or cautious managed fund. The building and ongoing maintenance of any portfolio can be a very time-consuming task. The use of managed funds – which are cautious or defensive in nature – reduce this burden by taking responsibility for stock selection and reviewing the portfolio.

Defensive managed funds have increased in popularity over the last few years as investors and advisers have looked for a relatively safe haven after the turmoil in the stockmarket.

In the defensive managed fund sector, asset allocation can vary quite greatly from fund to fund. Some of the funds in this sector are marketed as non-equity funds and hold no equities while some could hold up to a maximum of 35 per cent in equities. An equity holding of up to 35 per cent may be difficult to sell to some clients at the current time. This somewhat limited appetite for equity investment is aptly illustrated by the fact that the average defensive managed fund is currently holding only around 16 per cent in equities.

The cautious managed fund sector allows you to step up the risk ladder slightly with access to funds that can hold up to 60 per cent in equities, with the remainder mainly being held in fixed-interest securities and cash.

Funds in both defensive and cautious managed sectors must hold a minimum of 50 per cent in sterling-based assets. This helps reduce the overall level of currency risk that these funds are exposed to.

Lower-risk single asset class fund. A single asset fund such as a gilt or fixedinterest fund would be a low risk option but it would offer little diversification of risk and clients may suffer from investing solely in one asset class.

The range of cautious investments explored above might not hold the same excitement as investing in the FTSE 100 but that is not their raison d&#39etre. They are there to provide a solid base onto which more “sexy” investment strategies can be built – so now, as ever, remains a time to embrace caution, not abandon it.


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