In focus: OBSR examines Cautious Managed trio

OBSR’s Marianne Weller and Diane Earnshaw examine three funds in the diverse Cautious Managed sector.

The Cautious Managed sector is home to a wide variety of funds often viewed by investors and advisers as being suitable for risk-averse investors. In fact, the sector is not homogenous and there are a huge variety of managed funds to choose from in this sector that are diverse in their approach and the amount of risk the mangers of them are willing to take on. A Morningstar Direct search shows 170 funds sitting within this peer category.

At the current time, the IMA guidelines for the sector show funds have a maximum equity exposure restricted to 60% of the fund and at least 30% in fixed interest and cash. There is a specific requirement on the fund to hold a minimum percentage in non-UK equity and assets must have at least 50% in sterling/euro and equities are deemed to include convertibles.

Industry concerns about how the funds are described have prompted the IMA to undertake a review of the managed sectors in the autumn of 2010, the last full review having been back in 2001. The results of this review were released in May 2011 and prompted an extended consultation period until October 2011. Change is likely to come although the extent and impact of this is still unclear.

Sub-sectors

In our analysis of the Cautious Managed sector, we spilt the sector into broad sub-categories to help us look through the funds available.

These are: distribution funds where their asset allocation is biased to fixed income and income generation is an important part of the fund’s objective; traditional cautious managed funds that are typically managed with a relative return approach; newer multi-asset funds that can invest more widely across the asset spectrum; and other/specialist cautious managed funds. Funds within the sector can be directly invested, or multi-manager fund of funds that are unfettered or fettered internal fund of funds. So, lots to consider.

Invesco Perpetual Distribution

One of the larger distribution funds with assets under management in excess of £1bn is the Invesco Perpetual Distribution fund. The fund aims to provide a good overall level of return with potential future growth of income from the equity element, while the bond portion is managed with a view to creating income with due regard to capital preservation.

The fund is managed by Paul Read and Paul Causer, who are responsible for asset allocation and the fixed interest portion of the fund with the equity component being managed by Neil Woodford. A flexible asset allocation policy is pursued to respond to changing economic and market conditions.

We like the managers’ approach, their flexible asset allocation policy, and the way risk is embedded through their investment process, complemented by Neil Woodford’s equity investment style which tends to reflect a bias towards value.