Cautious funds no safety net for savers fighting inflation

Millions of savers were left high and dry by the loss of savings income that followed the plunge in interest rates two years ago.

The Bank of England's final cut took the base rate to 0.5 per cent in March 2009, and it hasn't moved since. What has moved, however, is the rate of inflation, and that has made it all but impossible to get real returns from traditional savings accounts.

So it is natural that many people have turned instead to the stock market in an effort to get more for their money. But where would the novice begin? Collective investments such as investment trusts and unit trusts are the most likely answer, and funds labelled with words like "cautious" and "balanced" would seem an obvious port of call.

Which is a mistake. The 225 funds in the "cautious managed" sector have, thanks largely to its misleading label, attracted billions in savers' money. But the sector houses such a vast range of styles and risk approaches that to group them under one umbrella is absurd.

That hasn't deterred Royal Bank of Scotland (RBS), which this week launched its own cautious managed and balanced managed funds - just a fortnight after fellow high street bank Barclays was fined 7.7 million for mis-selling investments to elderly savers.

To its credit, RBS attacked the many cautious and balanced managed funds that fail to keep a rein on risk. The bank said its new funds will be monitored daily to ensure they stay within a certain margin of volatility, a measure that few, if any, such funds take. However, the fact remains that savers attracted by the "cautious" and "balanced" labels would still be deceived.

For instance, the Volatility Controlled Balanced Managed Fund - likely to appeal to investors wary of excessive stock market risk - will actually have more than 80 per cent of its assets invested in equities at the outset, just shy of the 85 per cent maximum permitted by the Investment Management Association (IMA). The Volatility Controlled Cautious Managed Fund will be 55 per cent invested in equities, against a 60 per cent limit for such funds.

Over three years, the best fund in the cautious managed sector has grown 49 per cent, according to data specialists Financial Express - but the average over that period is just 9.5 per cent. The worst fund is down 14 per cent and is one of 14 funds to lose money over three years.

In fact, over that period, the average fund in the cautious managed sector has performed worse than the average fund in all but two of the IMA's 32 categories.Given such variance among funds that are supposed to invest cautiously, how are investors supposed to know what they are getting?

It's no wonder that mis-selling of these funds is rife, but it will continue until savers are given better protection against a fund management industry that continues to have little regard for transparency or fairness.

Avoid panic button

On THE topic of risk, few people watching for the first signs of an end to the recent resurgence in markets would have had Egypt in mind. The threat of a double-dip recession or perhaps a new round of bad news in the banking sector were more realistic candidates.

But the dramatic events in Egypt could prove to have repercussions for investors everywhere. It would be dangerous to assume that just because you don't have money in Africa or the Middle East that the aftershocks won't reach you. Recent history is littered with examples of regional crises with far-reaching global economic implications, including the Yom Kippur war in 1973 and the Iraqi invasion of Kuwait in 1990.

In our globalised 21st century world, the ripple effect can be felt more widely than ever.

Not only does the Middle East have two-thirds of the world's oil reserves, but it also has almost 50 per cent of world gas reserves. It doesn't take a genius to understand that uncertainty and instability in the region will have a big impact on the global economy. For example, any disruption to oil supplies caused by continued unrest would almost certainly drive up inflation and put another obstacle in the path of global growth.

But while the knock-on effects are far-reaching, investors should sit still. After all, last year brought us the Gulf oil disaster and the European sovereign debt crisis, yet few investors will remember those events now unless they reacted unwisely at the time. Most people invest for the long-term and some turbulence is inevitable - keep that in mind and stay away from the panic button.