PENSION savers and investors are piling millions into seemingly cautious investment funds unaware of the risk they may be taking.
That’s the warning from experts after new figures revealed that ordinary Isa investors are turning in growing numbers to funds that invest in different types of assets.
Investors ploughed £2.3 billion into stocks and shares Isas in the 2013-14 tax year, over £1bn more than in the previous 12 months, the Investment Management Association (IMA) has revealed.
The level of funds under management by investment houses hit a record high of £784bn in March. That month also saw £952 million more invested in equity funds than was taken out, as markets remained buoyant.
The best selling sector in recent months has been the “mixed investment 20-60 per cent shares” sector, with £285m more invested in the funds in March than taken out. But some say its popularity is cause for concern, suggesting the label creates a false sense of security.
There are more than 150 funds in the “mixed investment 20-60” sector, which stipulates that funds must have between 20 and 60 per cent invested in equities and at least 30 per cent in fixed income and/or cash.
Formerly known as the “cautious managed” sector, it was renamed three years ago amid concerns that the label was misleading. But that problem remains despite the change.
While the funds are often promoted to cautiously-minded savers as offering some protection against market volatility, some are far riskier than others.
“The 20-60 per cent shares sector is such a broad church that it’s almost worthless for comparison purposes,” said Barry O’Neill, investment director at Carbon Financial Partners
With managers able to change their asset allocation some cautious investors holding funds in the sector could unwittingly have 60 per cent of their holdings exposed to the stock market. While others happier to take greater investment risk could end up in low-growth funds with just a small portion in equities.
“A fund that holds 20 per cent in shares has an entirely different risk profile to one that holds 60 per cent,” said Patrick Connolly at adviser Chase de Vere.
Investors also need to be aware that a high proportion of funds in the sector are “fund-of-funds”, he added.
“This means they invest in underlying funds and so there is an extra layer of charges which makes some of them very expensive. Many have higher charges which aren’t justified by stronger performance.”
The surge of cash into mixed investment 20-60 funds may also be driven by the rise of the DIY investor, after rule changes last year left more people without access to investment advice.
“It’s possible that people aren’t aware of the level of risk they’re taking, especially if they are investing on a DIY basis without advice,” said O’Neill. “If you’re doing that it just places an extra burden of due diligence on you, so it’s vital to get under the bonnet to see what drives the performance and what could cause a crash.”
But for savers who know what they’re getting into the funds in the mixed investment sector can be ideal, not least because they provide a degree of diversification.
“These funds are usually best suited to those with smaller portfolios as it enables them to get diversification while using fewer funds, those who don’t want to constantly have to monitor the funds they hold and those who don’t have access to independent financial advice,” said Connolly.
“At a time when stock markets have done well in recent years and are conceivably due a correction and when fixed interest will be under pressure as general interest rates rises, at least investors in these funds should benefit from a degree of diversification.”