Small risk for the cautious

By DAILY MAIL REPORTER
Updated:

 

INCOME funds have been astoundingly popular in recent years. Now New Star, a favourite investment house among financial advisers, has launched a new style of fund for the cautious investor.

Helen Richardson

The Cautious Portfolio unit trust aims to produce an after-tax return of 3.5% a year, paid quarterly, as well as capital growth.

It plans to do this by investing in a range of other funds, cash, bonds and gilts, as well as complicated financial instruments known as derivatives.

New Star's head of fund of funds, Mark Harris, says the new fund's target market is the type of investor who, in the past, has put money into withprofits bonds.

'They want income, but they want their capital to grow, too,' says Mr Harris. 'There isn't really anything else that fits the bill.

'However, there is risk involved and this fund is in no way a substitute for cash investments. It is for investors with a cautious mindset who are prepared to take a bit of risk.'

This fund can go into property, commodities, investment trusts, hedge funds and cash funds. However, the mainstay will be conventional investments. More than a quarter of it - 28% - will be in corporate bond funds, namely Invesco Perpetual Corporate Bond, Old Mutual Corporate Bond and Aegon Extra Income.

And 39% will be in UK unit trusts or Oeics - three of the chosen funds are Invesco Perpetual Income, Framlington Monthly Income and Newton Higher Income.

The rest of the portfolio will be in cash and US and European trusts, with a small amount in esoteric investments such as emerging market debt, futures funds (which speculate on potential share price movements) and even a Japanese residential property fund.

Mr Harris says they are what make it different from other fund of funds. For example, the futures funds are there effectively to provide insurance for the shares part of the fund - so if the funds fall out of bed, then the derivatives 'bets' should make up for at least part of any fall.

The emerging market debt is there to boost the income - admittedly, at a risk. However, it will make up no more than 3% of the fund. The futures fund that New Star has picked offers an average annual return of 20% - and provides exposure to commodities: wheat, orange juice, sugar and coffee, for example.

But commodities are, by their nature, risky - hence only 1% to 2% will be invested in this market.

• PROBABLY the best way to buy this fund is through a fund supermarket, such as Hargreaves Lansdown Vantage or Cofunds (through independent financial advisers).

Fund supermarkets usually offer substantial discounts on initial charges by rebating at least the commission that would usually be paid to advisers.

What the advisers say

HELEN RICHARDSON (above), at adviser Unitas, says she is 'very excited'by this new fund: 'Basically, we've been crying out for a good quality, cautious income fund, and this ticks all the boxes.' There will be massive demand for it - the New Star team is so experienced at running these types of funds.'

BEN YEARSLEY, of advisers Hargreaves Lansdown, says New Star's fund of fund managers are a good team. 'This strikes me as a good fund with a reasonable level of income. Its nearest competitor is Schroder Cautious Managed fund of funds, and if I had to choose I think I'd go for the New Star fund.'

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