I have been advised to invest in a cautious fund in the stock market but have read about how some cautious funds are really quite risky. Are they suitable?
It really depends on what the word 'cautious' means. It's purely marketing twaddle for me, and I don’t believe investors are well enough informed on what it actually means when choosing a fund. I'll start with the punch line which will keep your attention through the rest of the column.
In order to make fund choice easier, sectors are created such as 'active managed', 'balanced', 'cautious' and 'Japan'. Each sector is given guidelines for investment and the funds which apply to go into this sector have to stick to these principles. For example, the cautious managed sector's guidelines insist that a fund has to invest in a range of assets where the maximum equity (stocks and shares) exposure is restricted to 60% of the fund. At least 30% of the portfolio must be invested in fixed interest and cash. There is no specific requirement to hold a minimum proportion of overseas equity but overall, the portfolio must have minimum 50% Sterling/Euro exposure.
This supposedly enables you or your financial adviser to be able to build a portfolio of investments from each of the sectors which effectively reduces your risk.
Advisers and investors alike would be forgiven for believing that any fund inside the cautious sector was safe to use as 'cautious', but the reality is quite different. The fund with the highest risk in the sector is 349% riskier than the lowest risk fund.(1) The highest risk fund in the cautious sector is actually riskier than the majority of funds in the active managed sector (which is classed as above medium risk). In fact there were only twelve funds in the entire active managed sector that had a higher risk than it.
The performance is also quite interesting. The average performance over the last five years for the cautious managed sector is 13.1% (2) The best performer returned 54.7% yet the worst offered a measly -7.1% over the five year period. It was notable that the AXA defensive distribution fund was in the bottom three with a return over the five years of -5.5%, 60% worse than the best performer. Santander, CF Miton and CF Midas, along with Insight, were also all guilty of posting negative returns over the period.
This is truly an amazing difference, and one can only assume they have very different investment philosophies in what is supposed to be a cautious sector. That is of course until you apply the research a good investment adviser would apply.
On closer inspection, what is supposed to be a benign sector is actually a bucket of 'stuff'.
The sector can have up to 60% in equities. Some won't go as much as 40% in equities but are still in the same sector. Others have a high equity content but then select a large content of high yield bonds (junk loans to companies) which provides a poor variance (balance) from equities as they have a much greater co variance with equities than that of investment grade paper. So you could be invested in double the risk as opposed to a spread.
And so, the cautious fund exposed to 60% in equities and maximum high yield bonds will have enjoyed a fantastic last eighteen months, just in time to suck in the cautious investor with their cumulative performance advertisements. The lower risk alternative within the cautious sector with exposure to high grade bonds, gilts and 40% equities will have underperformed but they will have delivered to the need of the cautious investor.
Their poor performance over the last 18 months in comparison to the aforementioned fund will not attract the investor when they assess this sector. They will be attractive after the next downturn, however, but that's just when investors should be looking for the upside return in the market. And so investors are constantly moved in and out of cautious funds at completely the wrong time, losing pounds after pounds of their hard earned cash.
For a fact sheet on cautious funds call Peter on 0845 230 9876, e-mail info@wwfp.net or take a look at our website.
The value of shares and investments can go down as well as up
Source
1. Lipper
2. Trustnet
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
Joseph, sorry you feel this way but you are wrong. This is not an 'advertorial'. It is an update on the state of funds written by a fully authorised and regulated individual and company. The disclaimer is there and is obvious.
You may not consider it news but many people do. Check out the broadsheets.
Thanks for your comments Joseph I appreciate it. I am not sure however you have read the same column as the one I wrote however so I would like to clarify some points here and welcome any interaction. I always appreciate any constructive communication especially anything that assist and guides customers.
Firstly. It is news. It is news because investors are being duped into these type of funds and they shouldn’t be and its for millions of pounds. If investors being duped into something they shouldn’t be for millions of pounds is not news, what is.
I write for the economic voice as a guest and aim to assist to guide people from funds like this. In contrast to your comment I am actually saying not to invest into these funds and be sure to get the best possible research and advice.
I am not marketing these funds at all. If I am to provide research and allow economic voice to publish the column, clearly a fair and reasonable payment would be to market the name of my company. Ezine is a specialist firm that does exactly this for millions of authors around the UK.
Secondly, I am not promoting these funds as good to invest into and have not factored inflation into them in exactly the same way as I wouldn’t factor inflation into a mortgage payment or a cash isa/building society.
The comparisons are all neutral. That wasn’t the point of the column in any event but perhaps a good column I could do if I take your lead on that might be to show how many funds consistently underperform inflation. That would be good reading. Although its your idea, I'll take the credit if you don’t mind!
As for commission?! I am confused by that. As a fee based firm we get paid for advice. Whether that advice is to disinvest from the market, invest in the market or realign a portfolio, we will be paid the same – a fee. There is no financial gain for us to invest a customers money.
I appreciate that in the past (and present) many advisers have been commission lead and they would have had the brunt of many of my columns especially the column I write for the Financial Times Business. And so we don’t get the commission, instead we charge a fee for the advice.
As for our fees in the fund. We have written in economic voice in the past on the cost of investing and you are correct its expensive if you do it wrong and buy in the expensive retail world. That doesn’t need to happen.
Here is a link to a column I have written on fees in investing but a customer investing with us will be commission free and buy a unit trust at creation price (c 0.3% maximum) saving the normal 5% up front fee.
http://www.wwfp.net/investment/uncovering-hidden-charges.html
Also we have drilled the ongoing costs down to a minimum.
Finally, as I say I am happy to follow up and receive any constructive criticism. We are here to help and this column was actually warning people rather than advertising as you have unfortunately incorrectly read. We are here to help but obviously will split our time where we feel its best used.
Thanks
Peter
Where economic voice choose to place the column is down to them. I am not an advertiser and dont pay to be an advertiser nor do they pay me.
In any event, it is clear you have a different interest here and have, following not read the column in the first place, decided to not follow up on the facts I have given you in my follow up.
I am unclear of your motivation so perhaps you could make that clear
Regards peter
From the website you quote Joseph:
k. An advertorial is an advertisement feature, announcement or promotion, the content of which is controlled by the marketer, not the publisher, that is disseminated in exchange for a payment or other reciprocal arrangement.
No payments change hands and there is no reciprocal arrangement.
Sorry James, I disagree and have our legal dept speaking to the advertisements agency.
What on earth is your motivation and how on earth have you the time so as to be so pedantic about whether or not this site puts something under news or not as long as we are educating the public away from things they shouldn't be doing. If they decide to put it under news that’s their prerogative. It is news as far as I am concerned but I leave it to the site to decide where they want to place it.
And I wholly disagree with all you say about fees commission and you have a very poor understanding of the experience.
E.G. Mr customer comes to me for advice, I tell them to put it into the building society or non commission paying collective per se, I charge for the two hours work. Where is the motivation to invest/tell them to go into anything else?
This is nothing other than negative backward thinking and I think its time we all got on with doing something fwd thinking and positive with our days.
I am about to write on the banks and their expected charges and lending so will sign off now
Regards Peter
I dont put the columns on the website. Whats your point. Perhaps if you go back and read the column properly you wouldnt have even opened the comments at all.
Joseph. Go out and get a job. You absolute waster with nothing to do other than pick arguments and fights about nothing. I'll bet you mow your lawn with a pair of scissors and have gnomes.
Lets face it: You didnt read the guys column and didnt understand it and you have been pulled on it so take responsibily and then go out and do some volountary work and create some good energy as the man says.
If you have nothing good to say, say nothing at all
Cheers PH
A reciprocal arrangement is one in which one party will perform a certain act if the other performs a specified act as well.
NO such arrangement exists Joseph. No party is obliged to supply the work and no party is obliged to publish it.
Also you may be interested in the concept of an 'invitation to treat'. An advert is usually an invitation to treat where a product is offered at a price so that someone can then make an offer which is either accepted or rejected. ie 'buy my apples at 50p a kilo' is an offer to treat and someone offering to hand the money over is making an offer to buy at that price.
Invitations to treat include the display of goods; the advertisement of a price or an auction; and an invitation for tenders (or competitive bids).
None of that appears in Peter's articles.
You are therefore wrong on all counts.
My thoughts exactly munchy. He clearly has or is a very very lonley man with absolutley nothing to do. Go get a job, get qualified, get a life, get out more or go and make the site you have better rather than trying to attack this one.
Sorry, been away administering our other sites.
Joseph you are wrong on both counts.
If we offered Peter space on the site which he paid for (we do not) then that could (note could) be interpreted as going some way towards what you are alleging.
In the second point if Peter put a product up and said this is great or my service is great than that could be interpreted as an advert .
Peter does neither, he gives free information and divulges the source of that information. To not declare his interest would be wrong.
The content is written by a professional and is correct therefore not misleading. It also does not say that his company is great or their products are great (hence my reference to invitation to treat).
The crux of the matter is whether we were paid by Peter in money or in kind to feature content that told the world how great his products are (that is what an advertorial is).
That is just not the case.
Far from us having no leg to stand on it is you who are trying to distort reality to fit into your own world.
Just for interest, early last year (2010), I conducted some very in depth research on these matters, which I cannot go into, and I am very content that what we are doing is correct. That is as much as I can say.
Looking good Admin…… http://housepricebubble.com/
I can go on as long as it takes Joseph.
Far from you convincing me, it has been me that has knocked your arguments out every time.
You have widened out your definition of advertising to suit your own ends, not looking at what an advertorial actually is. It might help you to Google 'advertorial examples'. It then becomes quite obvious that the writer of an advertorial pushes the company products and / or services. I'm sorry but t is not you that defines what an advertorial is.
What Peter writes is what is known as 'generic content'. That is, it is not product or service specific.
It seems to me that you do not understand the legal position at all. I do, as I have said I have researched it fully with relevant people, not just gone on prejudice.
You are also guilty of selective quotation, Peter rightly answered your questions. Do you actually read these responses properly?
By the way, your attempt to drive a wedge between Peter and us (or is it us and Peter?) has had the reverse effect. He rightly pointed out that it is The Economic Voice that determines where the article is placed, not the writer (or you!) and that is correct, it is us who decides that. Are you saying he is lying or something? No, you don't understand the situation.
We also have the final say on content such as images. And that is something you should also research!
Peter is also at liberty to consult who he likes over these matters. Getting a rounded response is good business practice.
Get over the fact that you are totally wrong. It is not an advertisement and your wishes and dreams do not make it so. And your 'quid pro quo' argument is spurious, check out the real legal requirements here, it must be a direct exchange between parties, not a supposed possible secondary or tertiary benefit.
Joseph, you are in total denial over the true situation, I cannot believe how easy it was to see you off. "I will now leave you to your miserable vacuum. You blew it." Is a while flag if I ever saw one.
Resorting to the 'you are a dunce' argument is offensive, especially when you cannot grasp the simple concept of what is and what is not an advertisement.
It is now extremely (!!!) obvious to me that you have not really talked to the people you claimed to have talked to.
Go and get real advice that is derived from real law, not your personally derived beliefs.
Actually Joseph, having looked at your biassed, nasty and mis-aimed comments, please do give us the benefit of a long (very, very long) and stony silence. We would all be grateful!
Right Joseph, let's get the lines drawn. Who do you think people should take financial advice from?
Sudden silence.
Joseph, you obviously do not want to really 'drag' this out as you know deep down that you are wrong.
Please accept your fallibility and move on.