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Time to add caution to the mix
By Fiona Hamilton
The investment mood has darkened, as fears about the ramifications of the credit crunch have escalated. With stockmarkets around the world suffering sharp reversals and expected to remain turbulent for some time, investors may feel tempted to sell up - but that could be a mistake in the long run as it is very hard to decide when to reinvest. Taking a more defensive stance is arguably a wiser move and Cautious Managed funds could be a good choice.
Funds in this sector are restricted to a maximum of 60% in shares. This made them look lacklustre during the bull market of the past four years, but their relative resilience in the preceding bear market demonstrated that they can offer a comparatively safe haven in less auspicious times.
The Midas Balanced Income and Ruffer Total Return funds have both been among the better performers over the last five years, and could be among the safer bets in a much trickier market. This is because both invest in highly diversified portfolios, and put a lot of emphasis on protecting investors from suffering any actual losses.
Although the Midas Balanced Income boasts the best five-year returns in the sector, manager Alan Burrows regrets that he was insufficiently cautious in the second half of 2007. But he was a lot more defensive than most, with just 28% in UK equities at the year end and a further 7% in overseas equities. Other elements of the portfolio include UK and overseas fixed interest, and commercial property - where Burrows had the sense to sell his UK exposure at end of 2006. But he has been disappointed that holdings in China, Eastern Europe, Japan and Germany have been marked down in the recent setback. He also has around 6% cash and some carefully vetted structured products.
"The first few months of the year will be very difficult," explains Burrows. "We need closure on the problems in the financial sector and that could take some time, but we don't expect a mass meltdown and some yield support is starting to emerge in the UK. For instance, we have already started picking up some bargains in commercial property."
Too cautious too soon The Ruffer Total Return fund suffered in 2006 and early 2007 from being too cautious too soon, but was rewarded with an exceptionally resilient performance in the second half of last year. Although the managers make capital preservation a high priority, they also aim "to deliver a stable investment return, well ahead of that from cash, in markets both good and bad". To this end they are prepared to make regular major adjustments to the fund's balance between equities, bonds and cash, and also to include some property and alternative assets. The unit price has more than doubled since September 2000.
Ruffer fears the market has been much too slow to "acknowledge fully the significance and longevity of the change in credit conditions". As a result the fund ended 2007 predominantly invested in 'fear' assets, ranging from gold to large, well-financed international companies, such as Vodafone and Coca-Cola.
The Investec Cautious Managed fund is the sector giant. It invests in a mix of blue chips and good quality bonds, and had close to the maximum permissible 60% in equities for most of the bull market, so it is disappointing that it did comparatively poorly in both 2005 and 2007. Manager Alasdair Mundy favours a very contrarian style - investing in shares which have considerably underperformed the market and then waiting for them to recover. He had a very good year in 2006, and his backers must be hoping he has another soon.
The second largest cautious managed fund is the Jupiter Merlin Balanced Income Portfolio, which also kept close to the maximum permissible 60% in equities during the bull market, but cut back to 50% in November. Just as importantly, most of the balance was in cash until November, when it was switched to UK Gilts and US Treasuries in expectations of interest rate reductions. Manager John Chatfeild-Roberts does not think the emerging markets are immune to a major setback in the US, and remains very wary of equities in the short-term, but he expects them to outperform other asset classes - such as cash, bonds, and property - over the longer term. He and his team pick a small selection of funds to provide exposure to their favoured regions, and have generally proved astute.
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