Experts say that a well-diversified portfolio should mean you are prepared for any scenario, and that it should include investments across a range of different asset classes spanning different regions around the globe. Crucially, it will also include elements that aim to protect you from a stock market crash.
But the FTSE 100 is currently experiencing its longest ever bull market, and many of those funds that have focused on growth or invested more aggressively have done very well, while those taking a more cautious approach have been left behind.
But do these cautious funds provide enough protection on the downside to make up for their lagging in the good times?
Analysis by Hargreaves Lansdown shows how the average Mixed Investment 20%-60% Shares fund, which limits equity investments to a maximum of 60%, has fared over the past decade, compared with the average performance of funds in the IA UK All Companies sector.
Data from the height of the financial crisis shows just how much a cautious fund can limit investors’ losses when the market tanks.
The average UK All Companies fund was down 18.6% between August 2007 and August 2009. Meanwhile, the typical Mixed fund lost just 7.2% over the same period.
The following year, as markets recovered, the average Mixed fund moved into positive territory, returning 0.6% in the three years to August 2010. UK All Companies funds were still 11.9% in the black at this point.
It took until 2013, some six years after the start of the financial crisis, before UK All Companies funds started to outperform their more cautious counterparts.
But, as the bull market properly took hold, this is when growth funds came into their own. Over a 10-year period the average UK All Companies fund is up 79.1%, compared with a return of 54.3% from the Mixed funds.
Long Horizons Suit Bold Strategies
Laith Khalaf, senior investment analyst at Hargreaves Lansdown, says: “Conservative funds help to staunch any losses when then markets are falling, but you shouldn’t expect them to outperform a fund invested purely into the stock market over the long-term.
“The longer your investment horizon, the more likely it is that an adventurous strategy is going to deliver better results for you.”
But the peace of mind that cautious funds can offer in bad times may mean they still have a place in investors’ portfolios.
Morningstar analyst Randal Goldsmith says the Bronze-Rated Premier Multi-Asset Distribution fund is a “strong choice for investors seeking income from a diversified multi-asset fund”. The fund managers emphasise diversification, which can lower risk, but better growth potential comes in the fund’s bias towards out-of-favour value investments. It has produced an annualised returned of 4.76% over the past 10 years.
Also Morningstar Bronze-Rated is the Kames Ethical Cautious Managed fund, which offers a balanced mix of investments with a strict ethical screening applied. The ethical bias of the fund means it suffered when energy, mining and banks stocks did well but Goldsmith says it has a strong long-term track record, with around half of its portfolio in fixed income. It has produced an annualised return of 6.3% over the past 10 years.
Funds Better on the Upside
Nathan Sweeney, senior investment manager at Architas, says: “The stock market goes up more than it goes down; it rises two-thirds of the time. So, if you pick a fund which does better when the market falls you’ll lose out over the longer-term because it’s approach means it can only outperform one third of the time."
Sweeney says the holy grail for investors is to find a fund which does well when the stock market soars but does not tank when it tumbles.
He likes the CF Lindsell Train UK Equity fund, which focuses on companies with strong brands. Firms such as Marmite-maker Unilever (ULVR) and brewer Heineken (HEIA) have high market share in developed countries and a growing presence in emerging markets, which provides more growth potential. Crucially, the products they make are those which are purchased by consumers regardless of the economic environment.
Morningstar analyst Simon Dorricott says: “[The fund’s] emphasis on quality companies has resulted in it losing less in down markets. The consistency of its relative outperformance is remarkable.” The Gold-Rated fund has produced an annualised return of 12.3% over the past decade.
Sweeney adds: “Finding these funds is the holy grail of investing but it is possible and I think they are going to be particularly important in the coming months, as interest rate hikes and the winding down of QE by central banks means the stock market could be about to become more volatile.”
