Cautious AFI cuts equities and bonds

The November rebalancing saw the Cautious Adviser Fund Index make a significant shift into property and structured products, with large reductions in equity and fixed interest allocations.

The Cautious Adviser Fund Index saw the most pronounced shift into property and structured products of the three indices in the November rebalancing. Total equity exposure was reduced by almost two percentage points, with the only increase in international shares.

However, the largest fall was in the allocation to bonds, which dropped by 3.5 percentage points. The move followed a similar reduction in May and indicates continued adviser wariness on the asset class.

The fixed income allocation is now five percentage points below that of the Association of Private Client Investment Managers and Stockbrokers’ Income portfolio. Mark Hinton, research analyst at Bestinvest and an AFI panellist, says the group has been cutting its exposure to bonds for the past two years and he is not surprised at the fall.

However, Bestinvest’s 35% allocation is in line with the Cautious AFI. Its largest position is in Royal London Asset Management’s Corporate Bond portfolio and Hinton says the £330m fund is a cheap way of accessing the asset class.

Bestinvest’s equity allocation to America has increased by one percentage point, at the expense of Europe. Hinton says: “We were underweight the US, compared with the consensus, and this is fine-tuning. We are not negative on Europe; it is about relative valuations.”

The firm uses seven funds for its Cautious AFI equity exposure: Artemis European Growth, Axa Framlington UK Select Opportunities, Liontrust First Growth, Merrill Lynch UK Absolute Alpha, First State Global Emerging Market Leaders, JP Morgan US and Martin Currie Japan.

The overall allocations to property and structured products have grown by 1.5 and two percentage points respectively. Two new property funds have been added to the index: Skandia Global Property Securities and Standard Life Select Property. Hinton prefers pure bricks-and-mortar portfolios for diversification and Bestinvest uses Scottish Widows Investment Partnership’s Propertyunit trust in its AFI selection.

The £1bn Swip portfolio – the most popular property fund in the index, selected by five panellists – held 45% of its assets in the retail sector at the end of October. The fund was launched in November 2004 and is run by Gerry Ferguson.

Structured product exposure comes from five new arrivals, each chosen by single panellists – Cazenove Multi-Manager Diversity, Insight Diversified Target Return, Newton Phoenix, CF Miton Extra Income and CF Midas Balanced Income. According to Financial Express, the Insight portfolio has the greatest exposure to structured products, with just over half of its assets.

The £80m fund of funds, run by Patrick Armstrong and Ana Cukic-Munro, was converted to a Ucits III structure in September. The fund has the flexibility to hold up to 70% in bonds or cash and 60% in absolute return funds or equities.

The £45m Cazenove fund, co-run by Simon Wood and Mark Harries, holds about one third of its assets in structured products. Its portfolio breakdown at the end of September was 34% in British equities, 31% in fixed income and 21% in hedge funds. The remaining assets were divided between property, commodities and cash. The fund, relaunched as a non-Ucits retail scheme in July 2005, aims to achieve long-term capital growth in excess of inflation, with low volatility.

Overall, 24 funds have been added to the index, replacing 23 ejected by the AFI panel. The most popular fund to leave the index is Aegon Sterling Corporate Bond – selected by three advisers in May – followed by New Star’s Cautious Portfolio and Fidelity European. A total of three funds from the Investment Management Association’s UK Corporate Bond sector have left the index, although the highest number of departures comes from UK All Companies, which has lost four.

All of the new arrivals have been chosen by one panellist each, with the Specialist sector seeing the biggest increase, growing from seven funds to 12. In addition to the two property portfolios, ACDS Lindsell Train UK Equity, Swip Absolute Return UK Equity, Schroder Income Maximiser and New Star Global Financials have also been selected. The £40m Lindsell Train Oeic has a minimum investment level of £500,000 and now appears in all three AFIs. The fund was launched in July and is run by Nick Train, with the aim of beating the FTSE All-Share index.

UK Equity Income remains the most popular sector, with its weighting up by 1.3 percentage points to 21.1%. The Protected/Guaranteed sector is now represented, following the inclusion of Close Fund Management’s UK Escalator 100 fund, by one adviser. The fund is a protected unit trust, designed to provide stockmarket-linked returns with 100% capital protection. Gains are locked in quarterly and Close pitches the fund as an alternative to instant access savings accounts.

Jupiter Income is the most popular fund in the index, chosen by seven panellists. Artemis Income has moved up one place to take second spot with six selections, overtaking Aegon Global Bond on five.

The Cautious AFI has performed well in 2006, returning almost 8% from January 2 to December 1, according to Financial Express. This compares with returns of 6.6% and 5.6% for the Apcims Income portfolio and IMA Cautious Managed sector respectively.

The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).