Multi-assetMar 26 2012

Does risk guarantee rewards?

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BySimona Stankovska

Constructing investment portfolios can be a minefield at the best of times.

However, the Japanese earthquake and tsunami, the Arab Spring and the bear market in August made 2011 an even more difficult year for investors to allocate their assets appropriately.

This led to aversion to risk, as most investors fled to safe haven asset classes or retained their money in cash in order to preserve their savings.

According to the IMA, the top-selling sectors for retail investors in 2011 were the IMA Cautious Managed, IMA Balanced Managed and IMA Sterling Strategic Bond sectors, which saw combined inflows of more than £2.4bn.

With £1.4bn of that going straight into the IMA Cautious Managed sector, could investors have been attracted to these funds simply because of their name, or were they really the best choice?


Research by Skandia last year found that roughly 90 per cent of financial advisers believe that funds labelled ‘cautious’ lull investors into thinking their investment is safe, yet the reality is often very different.

This common misconception led to the IMA renaming the Cautious Managed sector Mixed Investment 20-60 per cent Shares, on January 1 2012, in the hope that it will create more clarity for investors.

This means funds that now label themselves ‘cautious’ will mainly only be able to invest between 20-60 per cent in equities and half of the money that they hold has to be in the UK or Europe.

Patrick Connolly, head of communications at AWD Chase de Vere, argues: “The IMA was rightly forced to change the sector headings because the previous descriptions, while being great for investment companies trying to promote their funds, were potentially misleading.

“What they have achieved are headings which aren’t misleading, which are aligned to those used by life insurance companies and where investors should be more focused on understanding individual funds rather than assuming that all funds in a sector are similar. If an investor selects a cautious managed fund they quite rightly expect that fund to be cautiously managed,” he adds.

Martin Bamford, managing director of Informed Choice, agrees that the rename made sense, but argues that with many funds continuing to refer to their strategy as cautious, there is still room for confusion.

“Cautious can be a rather misleading title for a fund. The names of risk levels are very subjective and should be considered on conjunction with the financial goals of the investor. Too often, fund names are considered in isolation from investment goals,” he says.

“Holding up to 60 per cent in shares is certainly more cautious than an equity only strategy, but relative to most expectations of ‘cautious’ it is too high risk.”