Flexibility the key as caution reigns

\"I don\'t think people can see six weeks ahead, let alone six months\" - one expert\'s explanation for why AFI panellists are tending to increase levels of caution without abondoning aggression.

In the midst of global financial turmoil investors are increasingly searching for safety and opting for caution. According to the Investment Management Association’s (IMA) investment fund statistics for August, the most popular sector for three consecutive months was the Absolute Return sector. Meanwhile, the most popular UK domiciled ISA sector was Guaranteed Protected funds.

Are the AFI panellists also planning to increase their cautious stance at the next AFI rebalancing in November, or are they keeping faith with their fund picks?Ben Willis, the head of research at Whitechurch Securities, says he plans to increase his level of caution within the AFI, although his aggressive allocations will remain largely the same.

One of the funds Willis expects to include in his Cautious and Balanced AFI portfolios is the Cazenove UK Absolute Target fund. Launched three months ago and managed by Tim Russell, the fund aims for positive returns independent of British stockmarket price movements and economic conditions. Its target is 10% a year net of fees.

As Fund Strategy reported (July 28), the fund attracted wide interest when it was launched on July 18, taking £16m of new investment.

According to Morningstar, the Cazenove UK Absolute Target fund ranks third out of 11 funds in the IMA Absolute Return sector. Since its launch it has produced a return of 2.3% (July 21 to October 6), while the sector average return was a fall of 1.68%.

Although Willis is planning to add the Cazenove fund to his Cautious and Balanced AFI portfolios, he says his overall investment position will be maintained at next month’s rebalancing.

“In terms of assets it will still be quite aggressive,” says Willis. “We are long-term investors. There will be an increase to corporate bonds, especially investment grade, in the Cautious AFI and maybe the Balanced.

“But in terms of the Aggressive AFI it will maintain its equity exposure and still be very punchy. There won’t be too many fundamental changes, but we may reduce or cut resources.

“Overall we will maintain our position. When the market recovers we’ll be in the right position to benefit from it.”

The fund named most often at the last AFI rebalancing in May was the BlackRock UK Absolute Alpha fund. It occurred seven times in the Cautious AFI and six times in the Balanced. The fund with most occurrences in the Aggressive AFI was the M&G Global Basics fund.

Hilary Coghill, chief investment officer at City Asset Management, says flexibility is important in this volatile environment. She has chosen funds for the AFI that are able adjust their equity exposure.

“It’s very difficult to formulate a long-term view,” says Coghill. “I don’t think people can see six weeks ahead, let alone six months. I’ve used funds that have the ability to move between their equity [and fixed interest] weightings. You are having to rely on the managers to make the asset allocation switch, but with the Aggressive [portfolio] you don’t have that option.

“I’m increasingly believing that the credit markets will be the first thing to move. I think it’s going to be very difficult, though.

“The move back into aggressive may be a much faster move, if we find the bottom. The UK and Europe are much further back down the road than the US. So I’d potentially want to increase my dollar exposure and have a higher US weighting in the Aggressive.

“We’ve been reducing the UK [exposure] for some time and Europe is approaching that standard as well. Emerging markets are a problem at the moment. I don’t think they’ll recover ahead of the US.”

In fact, emerging markets have suffered tremendously in the past few months. According to Lipper fund performance data, the IMA Global Emerging Markets sector fell by almost 18% (17.96%) in a month (August 29 to September 30). European Smaller Companies was the second-worst performing IMA sector with a fall of 16.31% over the period.

The best-performing peer groups over one and three months to September 30 were the IMA Money Market, UK Gilt and Global Bonds sectors. Over three months these were the only sectors to produce a positive return, according to Lipper. Meanwhile, over one month, the IMA Money Market sector alone produced a positive return, albeit barely, at 0.04%.

At the last AFI rebalancing two of the 32 new fund entrants were in the IMA Money Markets sector: the F&C Money Markets fund and the Fidelity Moneybuilder Cash Isa.

Seven of the new entrants were in the IMA Specialist sector, including the Jupiter India, Neptune Latin America, Schroder UK Income Defensive and Swip Absolute Return Bond funds.

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).