FE Adviser Fund Index
Investors would have lost money in real terms if they invested in an average cautious managed fund in the past five years.
Between 2007 and 2011, annual CPI averaged at 3.2 per cent. An individual investing £1,000 would have had to see returns of about 14 per cent to beat inflation over that period.
Unfortunately, over the five years to January 1, 2012, the average fund in the IMA mixed investment 20-60 per cent shares sector - formerly the IMA cautious managed sector - returned only 5.22 per cent, according to FE Analytics. In effect, this means investors saw their capital eroded in real terms over that period.
Of course, the sector is notoriously broad in the investment strategies it can include, so some funds will have succeeded in beating inflation.
Chelsea Financial Services managing director and FE Adviser Fund Index panellist Darius McDermott says: “I do not think there is a simple answer for cautious investors looking for low-risk investments other than cash. With the safe-haven chase there has been, are gilts still safe on a total return basis? People are gradually having to accept they need to take on some risk.”
McDermott’s conviction that investor risk appetite is returning may well be reflected in the latest Bank of America Merrill Lynch Fund Manager Survey. The February global survey of 202 participants managing a total of £389bn showed the biggest monthly leap in equity allocations since the start of 2011, with a net 26 per cent of asset allocators moving overweight the asset class.
Nevertheless, the survey also suggested that while the risk-off trade might be falling, investors are yet to move into risk-on mode. The number of respondents who saw equities as undervalued fell over the month from a net 44 per cent in January to a net 33 per cent, while a net 68 per cent viewed bonds as overvalued. Yet it would seem to take a substantial change of fortunes to knock the appeal of cautious investments for retail investors.
Bank of England governor Mervyn King told a press conference last week: “I have deep sympathy with those who are totally unconnected with the origins of the financial crisis who suddenly find the returns on their savings have reached negligible levels. These are consequences of the painful adjustment prompted by the financial crisis and the need to rebalance our economy.”
Investors seeking to protect their capital should pay attention. McDermott says: “Even though inflation is reducing, with a cash benchmark you will still be making negative real returns. The question now is whether even cautious investors are willing to stomach this.”
Data supplied by FE