Safer path still needs careful planning

Uncertainty and volatility feed demand for products in the IMA Cautious Managed sector - but investors should select with care as recent performance among the 165 funds has been poor.

The past few months have been particularly testing for investors. The European sovereign debt crisis rumbles on. Only the names of the principal victims have changed. Fears of a second downward leg in the global economy have sent investors diving for less risky assets. Little wonder, then, that Cautious Managed funds have been in such demand. But is the faith expressed in them justified?

I have looked at this IMA sector twice since the collapse of Lehman Brothers a little over three years ago. In the most recent examination of how Cautious Managed funds were faring, about 18 months ago, I concluded that performance varied sufficiently for advisers to treat the selection for their clients with considerable care. As in my earlier look at these funds, I drew attention to the different approaches being adopted by managers. But it was apparent that there was real demand from investors for this sector.

Back then, the Cautious Managed sector was the top selling group of funds on the Cofunds platform, accounting for nearly 20% of net sales. It still leads the tables, only today the demand is even greater. In October about 55% of net sales were for Cautious Managed funds, up from 35% in September. According to Michelle Woodburn, the manager of group relations at Cofunds, there were special reasons for the leap in sales, but even so, this sector has managed to account for about a third of all net sales since the beginning of this year.

This is a remarkable performance, but concerns remain. Over the past six months, all but a handful of funds would have lost money for investors – just 19 funds out of the 165 that make up the sector were in positive territory. And the worst performing fund lost about 11%. Over a year the divide between best and worst is even greater. Even over three years, where the average fund delivered over 25%, there are still a fair few that failed to make money for their investors. (Trends continues below)

Perhaps the most significant aspect of revisiting this particular sector is that there appears to be little consistency with the earlier studies. True, CF Ruffer’s Total Return fund remains at the top of the five-year table and is consistently first quartile, but other reappearances are relatively few. Two of the top five funds in the six months charts have only been around for sufficiently long to feature in the one-year table as well, while one fund has only the short-term record. But for a sector where you would imagine consistency to be a virtue, it seems little different to the other IMA ­classifications.

Certainly, this sector must have been a marketing man’s dream. The number of funds has grown by a further 10 in the past 18 months and, if the fund flows into Cofunds are anything to go by, it must be a serious component of the open-ended market.

The continuing uncertainty over the likely direction of markets, unsettling volatility, economic gloom and worries over the euro makes it an easy call for advisers. But that does not mean it needs any less attention than other sectors when it comes to making a choice.

Interestingly, while the big fund management groups were making most of the running 18 months ago, they have been pushed out of the shorter-term tables to some extent by more specialised houses. Aberdeen is a clear exception to this, remaining in the top quartile over all four time frames reviewed. The M&G fund is a recent launch, so only appears in the six months tables. And the Kames fund is also relatively new.

The CF Whitefoord Absolute Return fund is worthy of a mention. In May 2010 this fund featured strongly. Although it appears just once in the top five this time – third over one year – it has remained in the top 10 since launch. This is a fund run by a boutique that is a partnership with a specialisation in pensions and is hardly a household name in the investment industry.

”Over the past six months, all but a handful of funds would have lost money for investors”

While it is understandable that, at times of market stress, Cautious Managed funds should be in demand, that they have remained so popular for so long suggests to me that either investors have become more risk averse or advisers find them an easy alternative. Given the variation in performance – itself an indication of the variety of approaches being used by managers – advisers would do well to undertake careful research before committing clients’ money to a particular fund.

Invesco Perpetual, for example, may remain third over three years with the European High Income fund, but short-term performance has seen them languishing in the fourth quartile. Indeed, the fund ranks 159th out of 165 in the six-month tables. These funds look increasingly as though they are no longer a “buy and hold” choice. It will be interesting to chart their performance if better conditions return to equity markets.