IFAs in dramatic flight from caution

Figures released late last year revealed Cautious Managed as the most popular retail sector, yet in the latest AFI rebalancing, panellists ejected four funds from the Cautious Managed sector.

Cautious managed funds have become increasingly popular as investors sought shelter from uncertainty in the equity and commercial property markets. According to statistics from the Investment Management Association (IMA), Cautious Managed was the most popular retail sector last November, with a net inflow of more than £150m. As an asset class, equities saw outflows of £606m.

FundsNetwork also reported an upsurge in investor interest in the sector last year. Cautious Managed was the third most popular sector in 2007, up from fifth place in 2005 and fourth in 2006. CF Midas Balanced Income and John Chatfeild-Roberts’s £1 billion Jupiter Merlin Income Portfolio both featured in the top 10 list of most popular funds sold through the platform in 2007.

Indeed, the Jupiter fund was second only to Invesco Perpetual High Income, in terms of inflows, in the more turbulent markets between July and December. This was a rise from eighth place in the first half of the year. The Midas portfolio, meanwhile, proved popular among the Adviser Fund Index (AFI) panellists during the November index rebalancing. The fund received one selection in the Balanced AFI and two in the Cautious index.

Like several funds in the Cautious Managed sector, the Midas portfolio takes a multi-asset approach to investing. Alongside its equity and bond allocations, the fund held positions in property, alternatives and structured products at the end of November.

Darius McDermott, managing director of Chelsea Financial Services and an AFI panellist, says he is a “big believer” in multi-asset products, and expects them to gain greater investor support this year.

“Chelsea has not had a lot to do with the Cautious Managed sector historically,” says McDermott. “We have tended to use best-of-breed equity income and corporate bond funds instead. But multi-asset funds offer a number of lowly correlated asset classes, which used to be the preserve of the mega-rich.

“Truly balanced portfolios should have a mixture of assets – including private equity, hedge funds, environmental plays and resource plays. Over a five-year period this should give equity-like returns with bond-like volatility.”

Tim Cockerill, head of research at Rowan & Co, does not use cautious managed funds but also predicts that the sector will continue to see strong inflows this year.

He says: “We are expecting the market volatility to continue for some time and all eyes are on the banks. I would not be surprised to see the FTSE at 5,800 or even a touch lower. We will be through the worst of it by the end of the year, but it will be a reasonably painful period. People will head for safe havens in times like this.”

McDermott says that Chelsea will start promoting multi-asset cautious managed funds more actively in 2008, and HSBC Open Global Return, Newton Phoenix Multi-Asset and Insight Diversified Target Return all appear on the firm’s buy list. HSBC Open Global Return, which sits in the Balanced Managed sector, joined the AFI in November after McDermott selected it for the Cautious index. As Fund Strategy reported last week, Cara MacGregor has been promoted to co-manager of the £30m fund alongside James Hughes.

The Newton and Insight funds were added to the AFI in November 2006 by single panellists. However, the Newton portfolio’s appearance was brief and it was removed at the next rebalancing point, last May. Insight Diversified Target Return remained for a further six months before leaving the index in November 2007. Indeed, the Insight fund was one of four cautious managed portfolios to leave the AFI during the rebalancing, despite retail investors’ growing appetite for the sector.

Barmac ACDS Castleton Growth, New Star Managed Distribution and Sarasin GlobalSar IIID were also ejected, causing the overall Cautious Managed sector AFI allocation to fall by over three percentage points, to 0.79%.

Only the UK Equity Income sector fared worse as its weighting dropped by 3.5 percentage points. Midas Balanced Income and Cazenove Multi-Manager Diversity are now the only Cautious Managed sector representatives in the AFI. The Cazenove fund, added to the index in November 2006, is run by Marcus Brookes, the firm’s newly-installed head of multi-manager.

However, the dramatic cut in the Cautious Managed allocation does not appear to be the result of poor performance last year. As the FTSE All-Share fell by 2% between July 1 and December 31, Cautious Managed dropped by just 0.68%. While disappointing in absolute terms, the fall was consistent with a sector that is able to allocate up to 60% of its assets in equities. “The funds are not equity-proof,” adds McDermott. “But the evidence is that they are doing what they are supposed to be doing.”

The biggest sector winners from the Cautious Managed and UK Equity Income reductions were UK Other Bond (up 2.3 percentage points), Global Emerging Markets (up 2.1 percentage points) and Global Growth (up two percentage points.) Of these, the emerging markets sector was the strongest performer in 2007, with a return of 34%. The AFI gained two funds from the sector – Axa Framlington Emerging Markets and Gartmore Emerging Markets Opportunities.