Cautious Managed funds must hold a minimum 30 per cent of their portfolios in fixed income and no more than 60 per cent in equities. Maintaining that balance means it is not a 'shoot the lights out' sector when equity markets soar. This year, it is up 14.77 per cent, against an average 20.60 per cent rise by racier rivals in the IMA Active Managed sector.
Performance of the IMA Cautious Managed sector vs IMA Active Managed sector over 1-yr
Source: Financial Express Analytics
But the fixed income element can buffer against bear markets. Last year, the average IMA Cautious Managed fund fell 15.84 per cent as the average IMA Active Managed fell closer to 30 per cent.
Their cautious nature is making the sector a hit with investors. Fund supermarket Cofunds says IMA Cautious Managed could be a best seller this year. In October, it accounted for one in five of Cofunds sales.
Five of the sector’s multi manager funds made the top ten - Henderson Multi Manager, Thames River Distribution, Thames River Cautious Managed, SWIP Multi-Manager Diversity and Jupiter Merlin Income.
Rob Burdett, co-manager of the Thames River multi manager funds says investors like the smoother returns that IMA Cautious Managed offers.
He says: "The funds offer consistency of returns in periods of market stress. Those conditions have been very apparent in the last few years. In times of strong ups and downs, even the average fund has done better than you might think."
He believes the sector's investment criteria particularly lend themselves to multi managed portfolios. Managers should be flexible, moving heavily into fixed income when needs must. Equity holdings in Cautious portfolios he has run with partner Gary Potter have dropped as low as 26 per cent in the past.
"If you look back over 12 month rolling periods, there has only been one time when the portfolio has not been first or second quartile since 2001," says Burdett. "And that has been during some of the most volatile conditions, including two of the biggest bear markets in history."
Following the sharp correction, particularly in financial sector bond issues, managers now expect less gains from their corporate bond portfolios as 2010 approaches. They expect equities to take up the slack. The Jupiter Merlin Income multi manager team led by John Chatfeild-Roberts believe markets will be positively surprised by the bounce-back in corporate profits.
But they warn that a sharp recovery is unlikely to follow the steep recession as is normally the case. The 'new normal' may be one of anaemic growth in Western markets and muted profits.
The Jupiter team is focused on underlying managers with a track record in identifying good quality businesses at good prices, particularly those with international exposure in emerging markets. The Jupiter Merlin Income fund has recently bought into Schroder Income to boost its exposure to recovery plays.
Bill McQuaker, manager of the Henderson Multi Manager Income and Growth fund, also expects equities to hold up into next year. His year-to-date equity performance has been driven by a relatively large exposure to the Far East. Specialist holdings in Jupiter Financial Opportunities and BlackRock Gold & General also made positive contributions.