Credit turmoil spoils year for all-weather funds

Mr Traulsen maintained that high costs in this sector could conceivably invoke the law of unintended consequences. He explained: “Managers forced to overcome high costs may take more risk in order to beat their hurdle. Even if costs weren’t the cause, it’s clear investors paid a lot of money for funds that largely failed to meet the appropriate expectations for a cautious fund in a down market.”

Against this backdrop, those funds with absolute return mandates have fallen short - even comparatively good performers such as Newton’s £131.9m Phoenix Multi-Asset fund. Following a stringent investment process, fund manager Phil Collins easily beat his mandate between 2003 and 2006, but in the 12 months to August 11 the fund recorded a loss of 3.4 per cent. In the year to December 1 – indicating the speed and intensity of recent market falls – the fund returned a loss of 22.4 per cent.

"In 2003-2005, since there were double-digit returns in equities, junk bonds, property, private equity and commodities, any fund invested in those areas should have produced double-digit returns. In 2007, when we produced roughly 5 per cent performance, the only underlying asset class that had double-digit returns was commodities - and that was offset by an appalling year from property," Mr Collins explains.

At the heart of the fund's strategy is diversification, born of the previous bear market, rather than active strategies such as shorting or asset allocation. But in a bear market with all asset classes tumbling, how realisable is an absolute return mandate of Libor plus 2 percentage points through diversification?

Mr Collins says: "Alternatives are becoming a little more correlated with equity markets. More recently, we have seen that correlation break down, particularly for commodities and property - property and equities have fallen at different times. But there is a risk that correlation will increase, and that is a risk for all funds, including Phoenix."

Despite many of these funds experiencing outflows in the past eight weeks or so, Alex Lyle, manager of the "reasonably traditional" £650m Threadneedle Equity and Bond fund, said in September that investors should not neglect the UK. "It is a cheap market and tends to be defensive in tough times," he said. "It also has very high exposure to oil and mining, which are sectors we have been keen on. We have reduced our position there but the outlook is still encouraging."

Whatever silver lining can be identified in this sector, paying fees on funds with high positions in cash or those that claim to be “cautious” while investing 60 per cent in volatile equities may be a pill too bitter for shell-shocked retail investors to swallow.