Cautious Managed: Which Funds Have Held Up Best?
We comb through the sector to see which funds have done the best job of protecting capital in the downturn.
We mentioned John Chatfeild Roberts' Jupiter Merlin Income previously, and would still highlight it as one of the better choices out there. However, we'll start with a quant approach this week. A quick screen on those funds with the smallest maximum drawdowns over the past three years give us the following: JPM Cautious Total Return (-3.02%), Insight Investors Diversified Target Return (-3.41%), F&C Blue (-3.42%), Threadneedle Defensive Equity & Bond (-3.94%), and CF Arch Cru Income (-4.61%).
With most of these, however, we think investors are sacrificing too much upside potential. Take F&C Blue: The fund keeps north of 80% of assets in short-term paper, and the rest in the Dow Jones Euro Stoxx index, with a derivatives overlay to add a bit more value. That's all fine and well in a downturn, but over time, it's not likely to earn you much. And a 1.20% TER--although low for the sector--strikes us as on the high side for something this straightforward with such limited upside. Finally, we remain concerned about the uncertainty regarding F&C's ownership.
Of the rest, JPM Cautious Total Return and Insight Investors Diversified target return offer more flexibility to generate outperformance in up markets by managing exposure to a wide range of asset classes. The Insight fund has done better recently, but it's a fund-of-funds offering, and thus has to contend with an extra layer of fees, whilst the JPM fund has a relatively svelte TER of 1.43%. For that reason, we have a slight preference for the latter offering.
Expenses are a concern in this category. We count no fewer than 10 retail funds carrying TERs north of 2.5%, in part owing to the prevalence of funds of funds. They include offerings from Premier, Marlborough Fund Managers, Brunel, and Elite. Cautious managed funds, by virtue of their multi-asset approach, do have scope to add considerable value via asset allocation, but market timing (which is what active asset allocation amounts to) is tough to get right on any sort of a consistent basis. There are always a few managers who do well in a given cycle, but to do it repeatedly is something else entirely. Moreover, managers forced to overcome high costs may take more risk in order to beat their hurdle. Whilst we can't infer causality, we note that the 10 funds with TERs above 2.5% posted an average loss of 7.85% over the past year, compared to an average loss of 3.74% for the sector. Even if the costs weren't the cause, it's clear investors in these offerings paid a lot of money for funds that largely failed to meet appropriate expectations for a cautious fund in a down market.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
