Still not chosen a fund for your 2009- 2010 individual savings account (Isa)? Unsure of which asset class to choose? Worried you only have two weeks left, but couldn’t read all the Isa adverts – let alone all the newspaper articles – in a month of Sundays? Tense, nervous headache? Forget Anadin . . . nothing works faster than FT Money’s Isa selection system. Try it now!
●Step 1: decide on your attitude to risk.
If the uncertain economic, political and fiscal climate has left you feeling cautious, or nauseous (or both), then soothe your symptoms with a Cautious Managed fund. It can offer targeted relief from the pain of volatility – or at least, that’s what it says on the packet. M&G’s Cautious Multi Asset Fund claims that it can help you “participate in rising asset markets while preserving capital as much as possible” – and it has delivered 14.5 per cent since its launch three years ago, outperforming the IMA Cautious Managed sector by 16.6 per cent. Its active ingredient, known as an “active fund manager”, can “respond to the actual correlation of assets” and, in a three-year clinical trial, limited discomfort to a 16.5 per cent fall, peak to trough, while other leading brands lost 23 per cent.
Warning: Not all Cautious Managed funds are necessarily cautious
or well managed. May contain 60 per cent highly correlated equities. In the case of the M&G fund, performance was derived from high-risk calls on emerging market equities, speculation on the euro, dollar and emerging market currencies, and movement out of overseas government bonds into corporate bonds.
The side effects of outperformance can include heightened underlying levels of volatility, according to the latest JP Morgan Asset Management Cautious Managed study. Investors may experience
a more acute sensation of loss – 45 per cent of investors taking IMA Cautious Managed funds between September 2008 and March 2009 lost more than 20 per cent, with some losing more than 40 per cent.
Always read the label – but if it says “Cautious Managed”, disregard it.
●Step 2: decide how much you can afford to lose.
If you are aged over 50 and concerned that losses could damage your health in retirement, consider Absolute Return funds. Their highly active ingredients can position themselves in all directions to achieve positive results in stressful market conditions. Regulatory approval is now pending on HSBC’s new European Alpha Equity fund, the offshore version of which achieved growth of 13.1 per cent in 2008. Available as
a daily liquid fund.
Warning: almost all absolute return funds are untested over more than two years. For details, see www.absolutehedge.com. Only available over the counter on payment of annual charges and performance fees.
Always read the label –
if you can understand it.
●Step 3: consider investing for income instead.
If the potential for
equity price volatility and dividend cuts is causing anxiety, try new improved bond funds. In tests last year, nine out of 12 months saw more money flow into bond funds than into any other sector. Practitioners recommend strategic bond funds, which can move out of investment grade bonds and into high-yield ones to maintain income levels, and currently offer net yields of more than 4 per cent.
Warning: funds in the Sterling Strategic Bond fund sector may not match the prescription. While
the Artemis Strategic Bond fund is 100 per cent invested in UK corporate bonds, Henderson’s Sterling Strategic Bond fund is 8.2 per cent invested in money market instruments, and Investec’s Sterling Bond fund is 64.1 per cent invested in non-UK bonds.
Funds in the Sterling Corporate Bond sector may actually contain traces of euro, dollar and UK government bonds. Fidelity’s MoneyBuilder Income is 43 per cent invested in non-sterling issues, while M&G Corporate Bond has 7 per cent in gilts.
Always read the label – but even if it says sterling, assume manufactured outside the UK.
●Step 4: minimise stress- related hair loss by giving up trying to pick an active fund manager.
Investors still suffering headaches and/or premature baldness are advised to skip steps one to three and seek cheaper alternative remedies.
Higher-rate taxpayers with no previous history of capital gains should seek the opinion of an index tracker fund manager, such as Vanguard, which can help them realise that investing £10,000 in an actively managed fund via an Isa will save only £45 a year in income tax, assuming a 2 per cent dividend yield, while costing them £160 a year in charges, based on the average total expense ratio of UK All Companies funds.
Incurring lower tracker fund charges may deliver savings of almost £1,300 over 10 years. Fully diversified multi-asset tracker funds, such as the eight-asset MAP fund offered by Frontier Capital Management, can reduce standard deviation to 5-7 per cent, as part of a volatility controlled diet. Chief investment officer’s advice: it does what it says on the label.
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