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
Sunday 11 November 2012
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
Mark Dampier: 'So what if a recovery fund is out of luck? The clue is in the title'
Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help
Questions of Cash: We bought the special ceramic poppies. Then the saga began
Five Questions On: GB Energy's new tariff
Halifax credit card charges: bank is forcing interest rate rises on its customers
- 1 Engineer pictured fixing plane's engine with 'duct tape' by concerned EasyJet passenger
- 2 Two-year-old says goodbye to bin man best friend
- 3 Saudi Arabia mosque bombing: Two volunteer security guards hailed as heroes for stopping Isis suicide bomber reaching worshippers
- 4 There is something wrong but very right about this Bible illustration
- 5 Remove smartphones from the hands of under-18s and maybe they will grow up to be less dumb
EU referendum: David Cameron's rules are a 'democratic disgrace', says French-born Scottish politician set to be denied a vote
Migrants in Kos: Photos show real tragedy after Brits abroad complain of 'awkward' holidays
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
A nation of inequality: How the UK is failing to feed its most vulnerable people
Australian man punched in the face for defending Muslim women from abuse on train
David Starkey 'tells Amal Clooney to shut up and stop over-promoting human rights'
iJobs Money & Business
£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...
£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...
£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...
Day In a Page
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool