Don't be fooled by 'cautious managed' funds
By
Associate Editor
David Stevenson Aug 27, 2010
Print this article
With interest rates at record lows, many savers are piling out of cash and into other asset classes. That's been great news for fund managers. According to the Investment Management Association's (IMA) figures, 'Cautious Managed' funds in particular are going great guns.
In fact, in June this was the sector most heavily bought by private investors. 'Absolute Return' funds have also picked up new punters. But watch out – despite the names, neither guarantees a safe haven for your money.
"Both those words – Cautious and Managed – normally give clients quite a nice warm feeling, but if you look under the bonnet you have a huge differentiation of risk," says Chris Andrew of Clarmond Advisors. For example, according to the IMA definition, Cautious Managed funds should be no more than 60% invested in equities. But as two major stockmarket crashes in the last decade testify, even a limit of 60% hardly looks 'cautious'.
Even more confusing, and unnerving, is that while some funds in the sector hold just 10% in ordinary shares, several have more than 70%, according to the FT. As for Absolute Return funds, such funds "have sprung up in recent years in response to demand for positive returns in all market conditions, with low volatility", says Alice Ross in the FT. The idea of most such funds is to beat the return on cash.
But working out what strategy they follow from their prospectuses can be nigh on impossible. And under the bonnet, they vary widely. "Some are equity-based while others invest in bonds. Some focus on the UK while others specialise in emerging markets." This wide variation hasn't helped performance. Absolute Return funds returned just 4.5% in the year to end-June as against 7% from lower-risk gilts and 20% from the FTSE 100. "They're certainly achieving the low-volatility tag," concludes Brian Dennehy of Dennehy Weller. "But that's because they're going nowhere, and that's not good enough."
The IMA has been reviewing its fund classifications. But this may not help much. It argues that, "unlike a number of other sectors", the Absolute Return tag refers to the fund manager's objective, rather than the assets he or she buys to get there. "It was felt the sector wasn't yet sufficiently large or mature enough to sub-categorise," says IMA Director of Markets, Jane Lowe. The bottom line for private investors? Don't trust a badge – find out exactly what a fund does before you invest. If you can't afford to lose your money, don't invest – a savings account is what you need,
Published in
Investments
| More
articles
by
David Stevenson
Related articles
-
By Tim Bennett, May 24, 2012
-
By Bengt Saelensminde, May 23, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.