'Boring' will be the investment hot spot for 2008

Turbulent financial markets, the ongoing fall-out from the credit crunch and recessionary fears all mean that more conservative funds are set to make a comeback on the radars of private investors and their advisers according to two leading fund pickers.

Speaking at a press briefing in London this morning, Richard Philbin, co-manager of F&C's billion pound multi-manager fund range, pointed out that data released by the IMA this week provided strong evidence that retail investors were beginning to panic as the industry posted net fund redemptions of £377.4 million in December, the second consecutive month of net outflows. With dramatic market falls in January, he anticipates investor appetite remaining cautious.

Whereas 2006 saw strong demand for commercial property funds and 2007 experienced renewed interest in the stellar performing emerging and Asian markets, the F&C multi-manager team believe that the new found risk aversion in the retail market will renew interest in cautious investments, including those which incorporate downside protection.

In particular, Philbin notes that following the introduction of Ucits III, which opened up the scope for retail funds to gain access to a wider range of investment tools including derivatives, take up of these powers has been slower than many expected. However, he believes that product development in this area may accelerate in 2008 as fund management firms seek to offer investor's capital protected funds and products with target returns over cash.

"Ucits III was introduced with a fanfare as it brought the prospect of wider investment powers but product development has been frankly disappointing. Despite having those new tools at their disposal, many fund management houses have shown a reluctance to use them and in some cases, such as 130/30 funds, they have been used to design products with more aggressive return profiles. At the moment we are looking for managers that have the know how to use derivatives for portfolio protection and who are proactively try to minimise volatility," said Philbin.

Another area where the F&C team expects to see new products developed in 2008 is in the area of capital distribution funds.

"In less certain times, equity income funds have always proven popular and this is sure to be the case during 2008 as the sector contains some of the best fund managers," said Philbin. "However, the introduction of a new flat capital gains tax rate of 18% means that for many tax payers, particularly those on higher rate tax, there are very distinct advantages going forward to getting their returns in capital distributions rather than dividends or interest. This is sure to be an area that product development teams are considering in detail and which may also draw upon the greater use of derivative skills."

Dean Cheeseman, who co-manages F&C's multi-manager funds with Philbin, added: "One of the issues that multi-managers, IFAs and other asset allocators need to grapple with when looking at such products is where they fit within a portfolio, since the underlying asset mix may not fit neatly into a traditional asset allocation strategy. Despite this, the non-correlated return profile of some of these funds could still be a potentially complimentary diversifier to a traditional fund portfolio."

He added that demand for more cautious, core products is likely to give further momentum for the explosive growth of multi-manager funds, which have become widely adopted by IFAs in recent years as their core investment proposition to investors: "Our aim is not to 'shoot the lights out' over short term time periods but to provide consistent returns across a balanced mix of assets, markets and fund managers. Multi-manager funds may be popular but they are not a 'fashion'. They are not meant to be sexy, they are meant to focus on steady returns and in times like these, investors see that as a positive, not a turn-off."

F&C expects demand for multi-manager products to grow as investor focus returns to the need for portfolio diversification. Philbin reminds investors to be mind-full of their time frame when investing. "Now, more than ever, is a time to look to the long term and not to put all of your eggs in one basket."