Given that the IMA's Cautious Managed sector is likely to appeal to investors seeking some insulation fro
m market downdrafts, it’s well worth examining how the funds held up during the recent liquidity driven sell-off. With that in mind, we’ll review how these offerings fared during the difficult third quarter and the sharp downturn from 15 June through 16 August.
It’s still more informative to look at how funds in the sector fared during the sell-off proper, which ran from 15 June through 16 August. Over that period, only three funds in the sector posted gains: JP Morgan Cautious Total Return, CF Ruffer Total Return, and CF Arch Cru Investment Portfolio. One note of interest is that Neptune Multi Manager Income, the sector’s best performer over the past three years, withstood the sell-off relatively well. The fund lost 1.31%, roughly 200 basis points less than the sector average.
The top performers had significantly higher large-cap positions than the worst quintile, and devoted less to financial services companies—not surprising given the effect of the credit-crunch on the sector. The stronger funds also tended to have more exposure to equities outside of the UK than did the bottom-dwellers. Even so, the ability of funds to withstand the downturn often boiled down to asset allocation. Take Aegon UK Cautious Managed and Aegon Ethical Cautious Managed, for example. Both funds fell more than 6% in the sell-off (the two worst performances in the sector), and both devoted roughly 54% of assets to equities as of 31 August—at the upper end for the sector. This clearly hurt them during the downturn, and more than offset other factors working in their favour (sizable large-cap stakes and underweights in financials chief among them).
One take away given the magnitude and range of these losses is that the Cautious Managed sector may be drawn too broadly in terms of its asset allocation parameters. Perhaps if you are going to describe a group of funds as “cautious”, there needs to be greater constraints around their equity exposures.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.