Uncertain about the economic and financial outlook? Unwilling to take much of a risk with your capital? You can still do better than leaving your cash in the bank.
Our selected have made average returns of over 9% a year over the past five years. That compares with under 4.5% net of tax from a savings account. So our selected Cautious Managed fund managers have done a good job in terms of return.
Of course, investors in Cautious Managed funds have made far less money than those prepared to take on the risk of a fund that holds all its money in shares - our selected Equity Income funds more than doubled their money over five years, with annual returns approaching 14%.
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Does what it says on the tin
Cautious Managed funds are cautious: they typically hold half their money in fixed-rate investments, which produce higher income and fluctuate less in price than shares.
Since we last reviewed these funds they have made only minor changes to where they hold their money; most have 40-50% in UK shares, a small amount in foreign shares and the rest in fixed interest.
Two exceptions are Invesco Perpetual Distribution, where Paul Read has almost 60% in fixed rate, and Threadneedle Equity & Bond, where Sarah Arkle has 59% in shares. Since Read is primarily a fixed interest manager and Arkle is an equity manager, it’s hard to avoid the conclusion that their personal prejudices play some part in their positioning.
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How our Best Buy Cautious Managed Fund have performed
* Return includes reinvested net income. Data to 22/10/2007. Source: Trustnet
Fixed rate outlook is improving
The key question for these managers is when and how to alter the proportions invested in shares and fixed interest. Six months ago, they were all pretty gloomy about fixed rate, rightly as it turned out.
Now, following a ‘credit crunch’ that has seen the gap widening between rates on safe and less-safe fixed-rate investments, there are better opportunities. Junk bonds are again yielding 9% or more.
Pick the right ones and you can do well in higher-yielding fixed rate investments, and as the debris from the US sub-prime debacle clears away, Cautious Managed funds may venture away from the high-quality, low-yield fixed rate investments they’ve held for most of the past year into slightly more exciting fields.
Since the managers are not expecting a lot of excitement from shares, and have most of their money in shares in the biggest UK companies, a better performance from their fixed rate investments will be necessary if they’re to keep returns anywhere near recent levels. In fact, I don’t expect them to do so: I think an annual return of 7-8% is a realistic target for Cautious Managed funds and you should treat anything on top of that as a bonus.
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Advisers’ top choices
The two funds most favoured by investment advisers are Gartmore Cautious Managed and Investec Cautious Managed. Both Gartmore’s Chris Burvill and Investec’s Alistair Mundy spend most of their time thinking about what could go wrong rather than gambling on what might come right. In that sense, they are more like fixed interest managers, who tend to be natural pessimists, than share managers, who tend to be optimists.
The managers of CF Ruffer Total Return are far more pessimistic than the rest, and are expecting a more serious crunch at some point as a result of overblown credit worldwide.
Their fund has a very wide spread of alternative investments including gold mining shares and government bonds in rock-solid places like Norway and Switzerland. If I was as pessimistic as they are, I would have my cash in the bank, but maybe they’re worried about the banks too.
With most large UK companies paying decent dividends, Cautious Managed funds are earning 2.5%-4% in income, which gives them a bit of a cushion against downturns. These funds can suit if you may need your cash in the next few years and have a place in our Short-Term Growth Portfolio.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
