Long-term assets reward the patient

Investing is largely about time horizons. There are those who invest over the long term and those who want quick gains from short-term investments. But when it comes to funds it makes sense to have a reasonable time horizon, given the charges involved.

Experience shows that retail investors flock to more defensive funds at the onset of a bear market. In 2001 and 2002 it was corporate bonds, and so far this time around it is cautious managed funds that are enjoying the inflows. Meanwhile, the Active Managed sector suffered outflows in December as investors fled from risk.

But have investors succeeded in escaping? Over one, three and six months the average return in the Cautious Managed sector was negative. According to the Barclays Equity Gilt Study 2008, in 2007 the best performing asset class was cash. On this evidence, any short-term move into a cautious managed fund seems questionable.

This is not an attack on the concept of cautious managed funds. With many funds making full use of the wider powers of Ucits III, the sector has evolved from just holding equities and bonds to portfolios that hold several asset classes. As such, there is a case for holding them, but only for a period stretching over at least five years.

It is over the longer term that the uncorrelated nature of equities, bonds, commodities and property becomes an advantage.

Over the long term, equities and bonds also outperform cash. According to the Barclays Equity Gilt study, over the past 10 years cash has returned 2.5% year, versus a 3.1% return from equities, a 3.3% return from gilts and a 4.2% return from corporate bonds. Over 20 years equities are the undisputed leaders, returning 6.7%, against 3.5% from cash, 5.1% from gilts and 4.4% from corporate bonds.

Of course, the past is not necessarily a guide to the future. For those who believe that deflation is imminent it probably makes sense to hold cash and high-grade bonds. But if the economic cycle follows a gentle path it is likely that equities will provide the best returns over a reasonable time horizon.

Patience truly is a virtue. Unless there is a protracted economic meltdown, those who invest in equities are likely to enjoy the best returns for relatively low risk if measured over the long term.