Long-term view is best kind of caution

The record outflow of assets from retail equity funds shown by the recent Investment Management Association (IMA) statistics (see news analysis, http://www.fundstrategy.co.uk/15662) is a worrying trend. While investors may be nervous about the state of global stockmarkets, pulling their money out now seems extreme.

It is hardly a surprise that investors are anxious. According to some analysts America is already in recession, while danger signs continue to circulate around the British housing market, with mortgage approvals at their lowest level since 2005 and growth in personal incomes set to suffer a squeeze.

Such risk aversion has led many commentators to suggest that 2008 will be the year of the cautious managed fund. Indeed, in the last set of IMA statistics Cautious Managed was the top-selling sector.

However, is chopping and changing to avoid potential short-term pain necessarily the best course? Investing in a cautious managed fund is preferable to investors divesting from equities altogether. But the most successful investors are generally those who take decisions and stick with them for the long term. Those who do not are likely to get carried away with short-term noise in the market.

When Nick Tucker, market leader for the UK and Ireland at Merrill Lynch Global Wealth Management, was asked last week where the globe’s highest net worth investors are now putting their cash, the answer was not cautious managed funds. In downturns, he said, ultra-high net worth investors are counter-cyclical and start looking for opportunities. Two areas he mentioned were credit and property.

Similarly, Newton Investment Management (see Focus, http://www.fundstrategy.co.uk/items/156638) speculated two years ago that consumers in the developed markets were carrying too much debt and it took a defensive position on the direction markets would head in. This initially hurt many of their portfolios as markets continued to soar, but after last summer’s falls many of their funds are now first quartile over one and three years.

The lesson learnt is that to make money out of the market it is best to take a long-term perspective. Going cautious now is not waving a white flag, though it could be that cautious investors miss out on potential rises in the market when they occur.