Tread carefully through cautious managed funds

With more than 100 products to chose from, be sure you know the level of risk to which your investment will be subject. Emma Dunkley reports

When you buy a product from the supermarket, you read the label and can safely assume that what's inside is what it says on the tin. But when it comes to investment, if you buy a cautious managed fund, you might be shocked to find that what's inside of it is not actually that "cautious".

These so-called cautious managed funds sit together in a category, but the name caused so much confusion and controversy that the group was re-labelled "Mixed Investment 20-60 per cent Shares" last year.

Despite the change in name, these funds are still being touted as cautiously-managed products. "Most people looking for cautious funds are older, looking for capital protection, security and not too much in equity markets," says Patrick Connolly, of the independent financial adviser AWD Chase de Vere.

However, you'd be wise to scratch under the surface to see what exactly is in these products, because not only do they vary wildly, but some have a large chunk of their holdings in shares.

"If you look at some of these funds, they have 60 per cent in equities – and they still have an aura of being cautious," says Brian Dennehy at FundExpert.co.uk. "But in no way is that cautious."

And there is a danger that if you invest in funds with a "cautious" label that have a lot of money in the stock market, then you might not be prepared for the amount you could lose during market downturns.

"Funds that have more than half of their money invested in the stock market do not fit into my interpretation of a cautious investment," says Gavin Haynes at Whitechurch Securities. "An example would be Kames Ethical Cautious Managed which has close to 60 per cent in equities.

"While I believe this to be a good fund, I do not believe that it fits the cautious label."

It's not just having a large amount in shares that you should be wary of, because bonds also carry risks. These funds, according to the Investment Management Association's definition, must have a minimum of 30 per cent in bonds and cash.

"Bonds can be volatile too," says Richard Marwood, who runs a couple of cautious managed funds at AXA Investment Managers. "No one should expect emerging market, high-yield corporate bonds to behave the same way that developed market government bonds do.

"What is most important is that investors and their advisers look beyond the fund labels and actually take note of what assets are held in their portfolios."

Although viewed as seemingly safer, bond funds actually fell further than equity funds in 2008 during the crisis, says Mr Dennehy. And with UK government bonds now at expensive levels and offering rock-bottom yields, there are doubts cast over whether there is any value left in them.

"Investing in bonds now requires more vigilance on the part of advisers than on any previous occasion, including 2008," says Mr Dennehy. "So you should be very wary. On the whole these funds don't feel 'cautious', certainly not with the swirling macro risks. Incautious funds in sheep's clothing?"

You will have to dig deeper still, though, than just looking at how much these funds invest in shares and bonds.

"If you are in high yield bonds, they can act like equities too," says Juliet Schooling Latter at Chelsea Financial Services. "It also depends on what shares you're in.

"So just saying 'bonds' doesn't necessarily give a guide as to how cautious the fund is."

Your version of "cautious" will likely be different to another person's interpretation of the term, depending on a whole range of circumstances. "So it's difficult to make something cautious," says Ms Schooling Latter. "There is a great disparity of returns among these funds."

The Newton Managed Income fund, for example, has returned around 35 per cent over three years, whereas at the other end of the scale, if you'd have invested in the JPM Cautious Total Return fund, you would be down by 5.6 per cent.

"The JPM Cautious Total Return has been very cautious and yet has had some pretty negative returns," says Ms Schooling Latter.

And you would hope that when markets take a turn for the worst your money in a cautious fund would be relatively safe. "In 2008 – it was a tragic year – the old cautious managed sector was down more than 15 per cent. That isn't cautious," adds Ms Schooling Latter.

A lot of these cautious products are also "fund of funds", meaning there is an extra layer of charges and the overall amount you pay in annual fees can be quite high – in some cases, more than 2.4 per cent.

"You mostly pay more because these are fund of funds – but why wouldn't you choose a good equity fund and a good bond fund?" says Mr Dennehy. "For example, Invesco Perpetual Income and M&G Corporate Bond, rather than a one-size-fits-all approach."

But to write off all cautious managed funds would be to dismiss a more than 100 products, in which there is some quality. Mr Haynes recommends the Investec Cautious Managed fund, run by well-respected manager Alastair Mundy.

"This fund aims to produce an attractive total return through a mixed portfolio of blue chip UK equities and investment grade bonds," says Mr Haynes. "It has a strong performance record and is an excellent choice within the cautious managed sector."

The Jupiter Merlin Income fund run by John Chatfeild-Roberts is another highly regarded and strong performing product. "For investors looking to go down the fund-of-funds route, then this has proved to be an excellent core holding within the cautious managed sector," says Mr Haynes. "This strategy is aimed at long-term investors who are seeking a sustainable level of income and steady capital growth."

Mr Connolly tips the Cazenove Multi Manager Diversity Fund managed by Marcus Brookes and the Fidelity Multi Asset Strategic fund, run by Trevor Greetham. "Most people who are looking in this sector are seeking to spread and diversify risk – these are multi-asset funds and they don't take big bets," says Mr Connolly.

So if you are looking to invest your money cautiously because you don't want to be heavily exposed to stock markets or risky bonds, don't blindly pile your cash into cautious managed funds. Look under the bonnet and check the charges, because there are some products out there that make it worth doing the research.

Emma Dunkley is a reporter for Citywire.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    Move over, kale - cabbage is the new rising star

    Cabbage is king again

    Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

    Paul Scholes column

    The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
    Frank Warren column: No cigar, but pots of money: here come the Cubans

    Frank Warren's Ringside

    No cigar, but pots of money: here come the Cubans
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee