Look at a graph of the FTSE 100 or S&P 500 over the last month and you’ll get as good a view of market sentiment as any. These indices may be volatile but their general trend is clear: they are going down.
This appears to be coming as something of a surprise to most of the market’s professionals – they spent much of last year telling us markets were cheap and bound to rise in 2008. But it clearly hasn’t come as that much of a shock to their clients – most of whom appeared to ignore all expert advice last year. In November and December, they weren’t buying as instructed. No, they were selling. In December there was a net outflow of £844m from equity funds.
However, amid the gloom there was one area of the market that managing to bring in new money: “cautious managed funds”. The idea of these is to give investors exposure to the stockmarket, but in a safe fashion. Instead of buying equities and nothing else, they limit themselves to putting only 60% of their funds into stockmarkets, with the rest going into bonds and even cash. This might mean they make less money in bull markets, but it should also mean they lose less in bear markets.
So does it work? It seems that it does. Over the last month, cautious managed funds would have lost their average investor 3.8%, which isn’t bad, given the FTSE as a whole is down nearly 10% so far this month. Over the last three months a cautious managed investor would be down around 5.2%. Again, this is fine, given the FSTE is down 15% and the average balanced managed fund (they put more like 85% in equities) is down nearly 8%. So the funds are doing what they’re supposed to: losing less than other funds when markets are falling.
But does that really make it a good idea to buy them? We aren’t so sure. For starters, the sector is a pretty “mixed bag”, says Trustnet.co.uk. There are some truly cautious funds that limit their exposure to equities to focus on fixed interest, investment-grade bonds and the like – things that make suitable holdings for “those looking for capital preservation and perhaps a retirement income.” However, others take a lot more risk, thinking that they can keep volatility down by diversifying into emerging markets, stocks, or energy and commodity stocks. Right now that might not be working very well as a strategy.
However, the main objection to these funds is less their performance than their point. As far as we can see, if you think the market is going to fall and can’t cope with the risks, rather than paying fees to lose less than everyone else, why not just get a good savings account? These are free to buy and you can get a good – and safe – 5% on them. And if you think the market is going up, why stay in a fund that is all but guaranteed to underperform the market?