Credit turmoil spoils year for all-weather funds

This year, of all years, should have heralded the triumph of funds in the Cautious Managed sector.

Considered the grey suits of the investment world, cautious managed funds vary from cash-like absolute return mandated vehicles to thoroughly diversified, global multi-asset vehicles. Both types aim to provide a low-volatility core holding for investors.

But the 2007-2008 credit crisis has drilled holes in these supposedly all-weather funds, making bad news trickle through to dampen the returns investors expected from such conservative mandates.

As John Husselbee, manager of the £18.1m City Financial Multi-Manager Income fund, said in September: “Cautious managed is very attractive from a sales point of view.”

As a member of the IMA committee that sets and polices sector definitions, Mr Husselbee was well aware of the requirement for cautious managed funds to have a maximum equity exposure of 60 per cent and a minimum of 30 per cent investment in fixed interest and cash. At least half of such funds must be held in sterling or euro denominations.

A fund that claims to be managed conservatively to offer both income and capital growth might be expected to have outperformed such volatile sectors as Japan Smaller Companies. Unfortunately, for risk-averse investors, in 2008 many of this sector’s funds failed to demonstrate sufficient caution in their investment strategies and only the top few managed to deliver positive returns over one year. According to Morningstar, the peer group stacked up a loss of 18.7 per cent over one year to December 1, and a loss of 11.2 per cent over three years.

Of course, the credit crisis has shaken and stirred every sector, be it equity, fixed interest or even money market. However, concerns about rampant inflation a few months ago have proved to be unfounded – despite several of the managers interviewed for this section citing it as a factor in their investment decisions – and the possibility of a deflationary environment in 2009 is growing.

Mr Husselbee said: “In a long-term period of inflation, the last thing you want to be in is bonds, as yields will rise and capital value will fall.” Consequently, his fund has held very short duration bonds, “close to cash”.

The manager of F&C’s top-quartile £21.7m Blue fund, Stephen Crewe, believes his fund’s cash bias sets it apart from its many peers that are cautious in name but less cautious in nature. In September, the portfolio had 82 per cent exposure to cash and 18 per cent allocated to equities.

Chris Traulsen, director of fund research at Morningstar, said at the time: “That’s all fine and well in a downturn, but over time it’s not likely to earn you much, and a 1.2 per cent TER – although low for the sector – seems high for something this straightforward with such limited upside.”