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It is no secret the recent volatility of global stock markets has had a damping effect on the appeal of traditional long-only equity funds for retail investors. Less obvious, though, has been a quiet and steady interest, and consequent growth, in the IMA Cautious Managed sector.

Although quarterly net retail sales of such funds peaked in the three months to June 2007 at £536.94m, they have continued to chug along seemingly little affected by the global financial markets’ recent turbulence.

“The Cautious Managed sector is seen as a sensible place for people to put money in uncertain times,” observes David Jane, manager of the M&G Cautious Managed Multi-Asset fund, which was launched in February 2007 and now has assets under management of £67.2m.

“Since launch, we’ve never had a day when we haven’t had inflows,” the manager says.

Like a number of his Cautious Managed colleagues, Mr Jane thinks the recent and sharp decline in the popularity of with-profit life assurance policies has contributed to the growing take-up of Cautious Managed funds. Many IFAs are now using them as the core around which they build their clients’ portfolios, the way they once would have done with the with-profit products, he notes.

“IFAs that used to sell with-profits policies are now selling managed funds, and typically when they do so they’re selling Cautious Managed funds,” Mr Jane said.

Cautious Managed funds are also seen as benefiting from the last market downturn that occurred with the bursting of the global tech bubble around 2000. It was during the recovery period following that downturn, which left many investors leery of long-only equity-based investments, that the number of Cautious Managed funds began to take off.

Some say a recent spurt in new Cautious Managed fund launches is being driven by introductions of funds like Mr Jane’s, which is multi-asset and, as he puts it, “can own anything”, unlike many traditional Cautious Managed funds, which tended to be more conventional in what they could invest in.

Importantly for many investors, a number of these new Cautious Managed funds are more readily able to invest in commodities, emerging market assets and other less traditional asset classes that have become more popular recently, and which are seen as hedging an investment portfolio otherwise heavily weighted in UK and US-facing stocks and bonds.

Thames River Capital’s co-head of multi-manager Gary Potter thinks talk of the importance of new and different asset classes is a “sideshow” to the basic story, which is simply that the time-tested Cautious Managed asset allocation recipe works.

“With their blend of an actively managed equities portfolio with fixed income assets and cash, Cautious Managed funds are a good each-way bet,” says Mr Potter, who co-manages Thames River’s two cautious managed multi-manager funds, launched in October, with Rob Burdett and a three-member team.

Still, with some economists predicting growth in the emerging markets this year will be double that of the developed world, other fund managers remain convinced a growing number of investors are looking for flexible, go-anywhere mandates.

Among them is Trevor Greetham, asset allocation director at Fidelity, who also manages the company’s 16-month-old £41.8m Multi-Asset Strategic fund. “I don’t think a lot of the other funds besides us include commodities,” he says “We have only a fairly modest position in them, but it certainly helps.”

Launched in January 2007, Mr Greetham’s is one of five Fidelity managed funds in the sector, another of which is the company’s £168.7m Multi-Manager Income fund. It fell 0.57 per cent in the year to 2 June and 0.78 per cent in the five months to that date, placing it 16th in the sector for both periods.

Its mandate of targeting a mix of global asset classes, including commodities, was one of the reasons behind the introduction of the Multi-Asset Strategic fund, a Fidelity fettered fund of funds, Mr Greetham says.

The other four Fidelity Cautious Managed funds include two variations on the multi-manager theme – one distribution, the other income – as well as a retirement fund aimed at generating income for retired investors and a wealth builder fund with a target date of 2010.

Alex Lyle, who is head of managed funds at Threadneedle and joint fund manager of its cautious managed Equity and Bond fund, says he is also keen on emerging markets and Asia because of those regions’ “superior growth prospects”, and also likes the mining sector.

Launched in 1997, the £650.1m fund is a fund of funds comprised of five Threadneedle equities and bonds products.

Cautious on property, Mr Lyle echoed the observations of other managers in saying he is also more picky about bonds in the current inflationary environment. Bond interest rates typically go up when inflation rises, making older bonds with lower rates of interest less attractive, and causing their prices to fall.

“Mainly we’ve picked up high-yield and investment-grade corporate bonds. We’re less enthusiastic about government bonds,” he says.

Steve Russell, co-manager of CF Ruffer’s £282.7m Total Return fund, is also making changes to the bond component of his portfolio. The fund has as its mandate “a fundamental philosophy of capital preservation” and was launched in September 2000, six years after CF Ruffer was founded by Jonathan Ruffer, Viscount Tamworth and Jane Tufnell.

“We have been increasing our exposure to index-linked bonds and away from conventional bonds because of the threat of inflation, and focusing on large companies with an ability to benefit, or at least pass through, inflationary pressures,” Mr Russell says.

The Ruffer fund takes risk aversion so seriously it managed to generate a return of 4.6 per cent in the year to 2 June, even as most of its peers in the Cautious Managed sector, as noted, lost money. This strategy placed Ruffer fourth on the Cautious Managed league table for that period, but now – even though it is not doing anything substantially differently – it is near the bottom over the most recent three months, with a fall of almost 1 per cent.

Mr Russell is not concerned. “Over the life of the fund, it’s averaging out to 11 per cent a year,” he said. “We just carry on producing slow but steady returns.”

Over at Thames River Capital, Mr Potter takes the view that if a particular sector, such as property, is languishing, it is best to avoid it altogether than maintain a holding just to meet some definition of “multi-asset”.

This is why he and Mr Burdett got out of property “about 18 months ago”, and are currently holding more cash than they otherwise would do if the marketplace were not so volatile.

“We are also holding more vehicles that are less correlated to pure equities and bonds,” Mr Potter adds.

The Cautious Managed sector may seem tightly controlled with its prescribed requirements for the percentage of equities, cash and bonds that must be held, but in fact there are often huge differences between funds in the sector, Mr Potter noted.

For example, the figures show one well-known fund in the sector has 7.2 per cent in equities, while another one has an equities allocation of 54 per cent. Another is shown as having 65 per cent of its assets in cash at the moment, compared with a rival with only 1 per cent, he says.

“When people look at the Cautious Managed sector, they think – in many ways quite rightly – that they should all be fairly similar,” he says. “But they certainly aren’t.”

Helen Burggraf is a freelance journalist