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Is there any point investing in the IMA Cautious Managed sector? Despite the widely held belief it is a safe haven, more than three-quarters of portfolios in this area have lost money during the past 12 months, according to Morningstar.

Just a miserly 20 of the 98 portfolios ended the year to 6 May in positive territory – and a number of these were up by less than 1 per cent. It may have been a tough period for global markets, but that is still a pretty woeful performance.

The average fund in this sector was down 3.8 per cent, which although better than the 9 per cent loss suffered by the IMA UK All Companies sector, was even worse than the 3.1 per cent fall of those in the Europe excluding UK arena.

What has been to blame?

Alongside the well-documented problems in global equity markets, Rebecca O’Keeffe, head of fund management at financial website Interactive Investor, believes the presence of commercial property in many funds has been the overriding issue.

“While you would expect the sector to underperform in a rising market, you do not expect it do so in a falling one,” she says. “The higher average holding in property has resulted in it underperforming both the Active and Balanced Managed sectors.”

This point is illustrated by taking a closer look at the best and worst performers over the year. The £334.2m JPM Cautious Total Return fund, she points out, has no exposure to property and 10 per cent in cash, and was up more than 6 per cent.

“The worst-performing fund in the sector was the £30.3m New Star Tri-Star fund which was down 14 per cent,” she adds. “This was massively hindered by having a 34 per cent holding in property.”

Although it is fair to say the performance of the average fund in the Cautious Managed sector has been lacklustre, it is important to look at the bigger picture, points out Geoff Penrice at Bates Investment Services.

“The Cautious Managed sector is down over the last year, but it has returned 46 per cent over the last five years,” he says. “For people wanting long-term returns above cash and inflation, but without great volatility, these funds have a role to play.”

And despite the recent problems, some of the sector’s funds have truly impressive long-term returns. The £1.1bn Jupiter Merlin Income Portfolio, for example, has delivered an impressive 60.8 per cent over the past five years.

Ben Yearsley, investments manager at Hargreaves Lansdown, believes the Cautious Managed sector has an image problem. A sizeable number of investors, he suggests, do not fully understand how funds in this area operate.

“The new Ucits III rules have rendered many of the older cautious funds as behind the times,” he says. “Many people go into these funds almost on the basis that they are absolute return funds whereas in fact the majority are not – they are often just a mix of equity and fixed interest names.”

However, investors can certainly be forgiven for finding it difficult to understand what they are buying. The sheer number of different portfolios available – each with their own set of objectives – adds multiple layers of confusion.

According to the Investment Management Association’s classifications, funds in the Cautious Managed sector are limited to a maximum equity exposure of 60 per cent, while at least 30 per cent of assets should be invested in fixed interest and cash.

There is no specific requirement to hold a minimum percentage of non-UK equity within the equity limits, although assets must be at least 50 per cent in sterling/euro, and equities are deemed to include convertibles.

When you factor in that the funds often have slightly different benchmarks to one another – and their respective managers are constrained by how far they can move away from them – it makes it extremely difficult to compare like with like.

How, therefore, can advisers – and investors – best get to grips with the sector? According to Andy Gadd, head of research at Lighthouse Group, there are three main sub-sectors with which people need to be familiar.

“The traditional cautious managed funds will invest up to 60 per cent in UK equities with the remainder in bonds and cash,” he says. “They do not generally invest overseas or in other asset classes to help limit the overall volatility of the fund.”

Of course, any fund that has more than half its assets in equities during a downturn across global stock markets is going to suffer, regardless of the skills of the individual fund managers or the prospects for the areas of the world they are focused on.

Next are distribution funds. “These invest in a mixture of fixed-interest securities and shares to produce a reasonable level of income with the prospects of capital growth,” says Mr Gadd. “They are at the less risky end of the spectrum as they tend to maintain a split of 40 per cent equities and 60 per cent bonds.”

Finally, there are funds of funds and absolute return funds. “These tend to invest in more areas than traditional cautious managed funds,” he explains. “In addition to UK equities and fixed interest, this may also include international equities, international fixed interest and property.”

This is not always appreciated by investors – and it is up to advisers to get these points across, says Mr Penrice at Bates.

“The asset mix in Cautious is less adventurous then the Balanced or Active Managed sectors,” he says. “However, as the underlying assets in the fund are volatile the fund itself will be volatile and this should be made clear to any investors.”

With such a diverse sector it is crucial to check that you are matching the objectives and risk profiles of investors in a cautious managed fund with the product that is actually recommended, suggests Mr Gadd at Lighthouse.

“It must be appropriate for the investor to have exposure to the equity markets, but to have it cushioned against more extreme movements that would result in a capital loss,” he says. “This cushion can be provided by less-volatile elements in the portfolio, such as bonds and fixed interest.”

For many the best route is to embrace more than one portfolio. Having exposure to a number of cautious managed portfolios will give investors the benefit of added diversification.

Rob Griffin is a freelance journalist