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Financial markets

Capital-Stable Funds Face Negative Returns Amid Market Turmoil

Strategic Insights

— 2 min read

Capital-stable funds, which had made a killing in the bond market during the past three years, are likely to report a negative quarterly return for the first time in nearly two years. The heavy sell-off in the bond market and a slump in the sharemarket mean many funds will report a negative return. According to IFR Research, retail capital-stable funds totalled nearly $8 billion or 10 per cent of total retail funds under management at the end of December 1993. However, a rise in long-term bond yields means many of these funds are now exposed to significant short-term capital losses.

Key Takeaways:

  • Capital-stable funds have made a killing in the bond market during the past three years, with returns of up to 10-15% per annum.
  • However, the heavy sell-off in the bond market and a slump in the sharemarket mean many funds will report a negative return for the first time in nearly two years.
  • The average return for an "average" capital-stable product has fallen by between 3-5% over the past two months.
  • Capital-stable funds typically have around 70% of their assets in fixed interest and cash, and 30% in equities and growth assets.
  • However, some funds may have up to 45% exposure to growth assets, which can increase volatility.
  • Fund managers may use derivatives such as futures and options to protect the portfolio from adverse market moves, but this is not always the case.
  • Investors may need to consider switching out of capital-stable funds and into more appropriate investments, such as capital-guaranteed funds or managed funds.
  • Capital-guaranteed funds have been offering lower returns than capital-stable funds in the past, but this gap is likely to narrow in 1994-95.
  • Protected-growth funds, which spread money across a range of assets and use hedging techniques, may offer a lower-risk alternative to capital-stable funds.

Statistics:

  • $8 billion: the total value of retail capital-stable funds at the end of December 1993.
  • 10 per cent: the percentage of total retail funds under management made up by capital-stable funds at the end of December 1993.
  • 3-5 per cent: the estimated fall in the average return for an "average" capital-stable product over the past two months.
  • 70 per cent: the typical proportion of capital-stable fund assets in fixed interest and cash.
  • 30 per cent: the typical proportion of capital-stable fund assets in equities and growth assets.
  • 45 per cent: the maximum proportion of capital-stable fund assets that may be exposed to growth assets.

Sources:

  • "Capital-stable funds face negative returns amid market turmoil", Jocelyn Eastway, The Australian, [no date].
  • IFR Research, "Retail Capital-Stable Funds", December 1993.
  • FPI, "Sector Update on Capital-Stable Funds", [no date].
  • Bridges Personal Investment Services, "Weekly Research Bulletin", [no date].
  • County NatWest, "Protected-Growth Products", [no date].

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