the funds protect investors from worst effects of the stock market slump but on average still posted a 3.67% loss over the past three years
Funds in the cautious managed sector have shielded investors from the worst ravages of the stock market over the last three years, but on average still posted a 3.67% loss.
Billed by a number of providers as a viable alternative to with profits, cautious managed funds have been able to smooth returns through an equity/bond asset allocation split.
The IMA requires cautious managed classified funds to be a maximum 60% invested in equities, with at least 50% of the portfolio held in sterling or euro-denominated assets and no limitations on UK exposure.
Despite the sector's strong performance equity funds, cautious managed remains only the 23th most popular IMA sector in terms of assets under management out of 31 fund categories, ahead of such hard sells as Japanese Smaller Companies, UK Index-linked Gilts and guaranteed/protected funds.
In September 2002, cautious managed funds were the 19th most popular buy, with gross retail inflows of £14.05m, taking the value of the sector's funds under management up to £865.64m, of which over a quarter, some £265.86m is Isa money.
Gross institutional sales reached only £12,100 last month, highlighting the retail bias of such asset allocation-led vehicles.
The sector is an amalgam of directly invested funds and funds of funds vehicles, both fettered and unfettered.
Mayflower Haven Portfolio, managed by John Ross, is a directly invested fund with UK equity, fixed interest and cash holdings.
The fund was born from the merger of two income portfolios and only switched into the cautious managed sector four months ago, although it has retained the now merged Mayflower Income Portfolio's longer-term track record.
Since moving sectors, Mayflower Haven Portfolio has posted growth of -0.2% over the three months to 21 October, bid to bid, compared to a sector average of -1.8%.
Ross said the fund is run with a conservative mandate, which looks to provide a respectable yield above that of the FTSE All-Share along with capital growth, but without taking undue risk to achieve it. The fund is targeted at the group's older investors and as such places great stock in capital preservation.
Over three years to the end of September Mayflower Haven Portfolio has posted growth of -12.81% versus a sector average of -3.67%, but the fund is paying a 5.3% gross yield, which compares favourably with the FTSE All Shares' 3.5%.
The comparison is specious at best, however, and does not compare like with like, Ross said.
'The fund had a far greater equity content, but in order to comply with the IMA's rules we had to divest some of the equities and buy bonds,' he said.
Ross has struggled to buy bonds at suitable prices though, with the clamour for the asset class pushing up prices and consequently pushing down yields.
Ross said: 'I ultimately want more in bonds for the longer-term, but at this stage, fixed interest investments do not look good value after the run they have had.'
As such he currently only has 25% of the portfolio in fixed interest, diversified across a range of sectors. The fund avoids high yield fixed interest securities, favouring more traditional, solid blue chip corporate debt, including Bradford & Bingley, Bristol & West, Sainsbury's and Boots.
Equities constitute some 55% of the portfolio and although index aware, the fund is very actively managed with a mid cap bias.
'We never have a zero weighting in the big four sectors-banks, pharmaceuticals, oil and gas and telecoms, although mid caps would be the main focus because larger caps do not pay such attractive dividends,' Ross said. 'I am looking to increase the equity weighting having just taken profits from a number of stocks.'
The equity quotient presently constitutes 48 stocks, which is typical for the fund, with the majority FTSE 250 companies, along with a number of FTSE 100 stocks to mitigate the risk of missing any market rebound. Smaller companies are generally avoided, again largely for risk and dividend reasons.
In lieu of a larger fixed interest quotient and following the sale of a number of equity holdings, Ross is currently holding 20% in cash. Although he is looking to invest much of it, the fund's mandate allows for a 30% to be held in cash for up to three months.
The light bond weightings have not only hit performance relative to peers over the longer term, but also pushed up the fund's beta to 1.34, the highest in the sector and significantly higher than the 0.96 sector average. That said, the annualised figure does not take into account the fund's recent change of direction.
Credit Suisse Multi-Manager Balanced Strategic Portfolio, managed by Gary Potter and Robert Burdett, is another of the sector's younger members, but has now attained its one year numbers.
Over one year to the end of September, the fund has posted growth of '3.43% compared to a sector average return of '4.04%.
Burdett puts this down to favouring managers with the freedom to run flexible mandates. Many of these are from smaller boutiques and not averse to holding large weightings in cash.
The fund's largest holding is BWD UK Equity Income, managed by Colin Morton. The team sold out of HSBC Growth & Income and HSBC European Growth, following the departure of managers Tim Russell and Chris Rice to Cazenove. These funds were replaced with Jeff Saunder's Martin Currie UK Growth and LeggMason European Growth, run by Keiran Gallagher.
Potter and Burdett use questionnaires to help them understand different managers' investment styles. The answers are fed into a 16 factor scoring process, which rates the characteristics of a fund and its management. 'The first section seeks to rate nine aspects about the investment management company from an organisation perspective, including leadership of the business, investment culture, quality of the investment team, its research process and how staff are motivated,' Burdett said.
'A further seven factors relevant to the fund itself, including fund size, stock selection ability, investment strategy and approach to risk are also marked. All factors are differently weighted and at the end of the process, a weighted and unweighted score are produced for both sections.'
Although quantitative screens are heavily used in the process, Potter and Burdett use them more as a guide so as not to rule out situations like turnaround stories or new launches.
The fund selection process is effectively divided up between the pair, with Potter covering the US, Asia, emerging markets, UK equity income and global bonds while Burdett manages Europe, Japan, UK growth and the various other fixed income areas.
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