Cautious Managed: Where's the Caution?
IMA cautious managed funds fail to provide much of a cushion in credit crunch.
The other issue is the overwhelming emphasis put on yield by many investors and by the funds themselves. To be blunt, you shouldn't care about yield exclusively--what matters is total return, including both capital gains and income. The problem with a yield focus is that funds will end up taking risks to plump up their income, and it really doesn’t do you any good at all if the fund is paying out a healthy income if your capital base is shrinking dramatically at the same time. Many funds will also take their costs out of capital (instead of income) to help ensure a strong yield, which can erode the fund's capital base further.
On average, the sector is down 3.65% in the past year. That isn't bad at all: It handily beats the FSTE All Share's 8.7% loss for the period, but lags a simple benchmark of 50% MSCI World Free and 50% Lehman Sterling Aggregate, which would have returned 1% in the period. However, it masks a wide range of results, including some steep losses. Among the steepest came at income-oriented funds such as New Star Managed Distribution and F&C Multi Manager Distribution. In the case of New Star, exposure to banks and a substantial stake in junk bonds hurt badly as financials tanked and credit spreads--particularly on lower-rated issues--widened sharply. The New Star fund lost 15.6% over the past year, whilst the F&C Fund, taken over by Dean Cheeseman after Richard Philbin left F&C in April, is down 15.4% in the same period. Other heavily income-oriented offering such as Fidelity Multimanager Distribution, CF Midas Balanced Income, and Standard Life Dynamic Distribution were also hit hard.
We prefer offerings that strike better balance between preserving capital and the pursuit of income. Among funds in the sector, it won't surprise anyone that Jupiter Merlin Income is among our favourites. We're not happy about the 2.30% TER, but at least here you get true multi-asset exposure (which makes it easier for the fund to justify its fees via savvy asset allocation) and fund selection backed by the experience of John Chatfeild Roberts and his group. The fund's trailing 12 month yield was 3.95% at 31 August, well under the 5.30% and 5.58% paid out by the New Star and F&C offerings, but it lost just 2.97% over the past year.
Beyond that, we think more people should be thinking more about target-date (lifecycle) funds, which adjust their asset allocations to become more conservative as the target-date approaches. Fidelity offers a range of these, including Fidelity Wealthbuilder Target 2010, at a very reasonable cost (the 2010 offering carries a TER of 1.41%). The upheaval on the multimanager team there has been unsettling, but the concept is a sound one that deserves more attention from investors.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
