Volatile investment markets mean investors are becoming more cautious with their saving. Frank Morton tackles some of the issues
Recent Prudential research among IFAs shows six out of 10 advisers say more than half of their clients are now looking to a more cautious investment strategy. This is backed up by IMA statistics which show the change in attitude has been reflected in net retail sales of equity ISAs and the cautious managed sector was by far the best-selling each month since November last year. Investors should not be put off by the term equity ISA and remember that exposure to risk and volatility can be reduced by investing in a cautious-managed style fund that is diversified across many assets.
If this is the case, is a cautious investment strategy the way forward? It appears that it may well be. Some of the major investment houses have become recent converts to the cautious managed sector, accepting the case for multi-asset managed solutions which can generate attractive returns for investors without the need for safety harnesses.
I don't mean to infer there is no risk - of course there is, but it's lessened by a wider spread of assets and in some cases guarantees.
Equity ISAs can come in many guises - managed defensive funds, for example, aim to provide a high degree of capital preservation, while also targeting a return in excess of cash - a requirement that satisfies most investors. The portfolio offers exposure to a diversified range of assets and may be suitable for someone looking for a lower to medium risk home for their money, or a stable core for their overall investment portfolio.
It is widely recognised by investment academics that asset allocation is the single most important investment decision you can make. Asset allocation can provide up to 90% of your client's investment return with the remaining 10% from stock selection. So it is really crucial to focus on asset allocation when developing investment recommendations for your client.
I don't subscribe to the view that cautious investors are somehow "investment wimps or amateurs". It smacks of the "if you can't stand the heat, stay out of the kitchen" adherents. Why bear the heat of the kitchen if there's someone in there managing the temperature for you, but still creating attractive results. There is a higher level of skill to taking the heat out of the investing "kitchen" while still providing a tasty outcome. The growth in this area suggests there is a real appetite from investors and a growing recognition of the cautious sector's relevance in today's markets.
Sceptics will dismiss the possibility of having equity returns without the accompanying levels of risk - I beg to differ. Let me be clear, managed funds should not set themselves up as the equivalent of equity funds in terms of return expectation. The purpose of a managed fund is to create something acceptable and suitable for investors who are not investment bungee jumpers, but prefer cocoa and a quiet night in.
So, while some investors are sophisticated or experienced enough to stomach the ups and downs of the markets, many are unwilling or lack the confidence to get involved. We are never going to close the gap between what people need for the future and what they have set aside to date if we are not bold or creative enough in developing a range of suitable and relevant investment solutions which investors can understand, embrace and profit from. Cautious and defensive options are not only perfectly acceptable; they are valid, necessary investment options.
Clearly there is a lot of uncertainty in the markets and investors are generally taking a more defensive stance with their money. Now is a good time to be positioned this way, but it is vital to remember that a cautious investment will always have a place as a core holding for investors. Multi-asset style of investing works through all market conditions, and in an investment environment such as the one we are experiencing now it will tend to get noticed more than usual. The focus is really on building up a long-term savings portfolio and reducing the high risk exposure.
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