What is a cautious fund? Which are the best?
Posted by: Brian Dennehy
At the outset, it’s worth highlighting two key points: (1) Just because your fund choice is cautious doesn't mean you have to accept mediocre performance (2) Investors shouldn’t adopt a “buy-and-forget” approach - inertia is one of the biggest roadblocks to investors making the best possible gains, because even the very best funds will go off the boil eventually.
What qualifies as a cautious fund?
At a basic level, a cautious fund is one that is spread across more than one asset class, and which restricts how much can be in the stock market. There are other definitions but this is a good starting point.
Who is it most suitable for?
Either a novice investor or someone who would find the day to day ups and downs of the stock market too volatile.
The hunting ground for cautious funds is primarily two sectors.
Mixed Investment 0-35% Shares sector
Mixed Investment 20-60% Shares sector (which used to be called the “Cautious Managed” sector)
How to choose a fund
For less active investors we use a process called Vintage Fund Ratings to rank funds. In a nutshell, a Vintage-rated fund has to be in the top 40% of performers for 60% of time-weighted periods over the last 10 years. This time-weighting means that we are weighting recent performance more highly. On this basis, the best Vintage-rated funds from our recent research (run each July) are:
We haven’t included Absolute Return funds. Why? These are typically not bought by retail investors. They are primarily bought by discretionary advisers/stock brokers and fund of funds to provide diversification for a larger portfolio. Typically, they are over-complex for retail investors (and many advisers too!) and the evidence is also that most are simply not good enough.
ACTION FOR INVESTORS
Don’t accept mediocrity
Do have a process to select funds and apply it with discipline
Don’t fall into the inertia trap