As the bull market matures and falters, investors might want to position themselves in a more defensive way to weather the challenges to come.
Over the last months, the oil price has been volatile, trade war rhetoric has been running high, Brexit continues to weigh on the UK economy, and the global bull market could come to an end at any point. So now is a good time to consider switching to investment funds well-suited to a more volatile and riskier environment.
Often the best way to cope as the economic cycle matures is by diversifying your portfolio and adding some defensive positions. We have rounded up ten investment funds and trusts that might fit the bill.
Tom Stevenson, investment director for Personal Investing at Fidelity Personal Investing, argues that ‘a good starting point for someone looking to add some diversification is an active global equity fund, which is able to cherry pick the best stocks from across the globe.’
This Money Observer Rated Fund is a global fund he is a fan of. It’s run by James Thomson and Sammy Dow, and it has over half its holdings in the US stock market.
Adrian Lowcock, investment director at Architas, recommends some defensive exposure to equities. ‘This is a strong core equity income fund managed by the experienced Michael Clark,’ he says. The fund ‘has a good level of downside protection’ with a portfolio of around 80 stocks.
Clark ‘takes a very methodical, steady approach with a measured attitude to risk-taking. The fund is primarily large-cap focused, investing in “steady eddy” companies with some value, and cyclical companies at the edges.’
This Money Observer Rated Fund is also worth considering. It invests in shares and bonds, both in the UK and overseas, as well as ‘alternatives’ such as property and hedge funds. However, the portfolio is conservative in that it has a maximum exposure to equities of 30 per cent and aims for maximum volatility of 7 per cent.
The manager, Paul Craig, has been reducing risk by introducing some alternative income investments such as specialist credit, asset-backed securities and reinsurance funds.
Lowcock also mentions this fund, which is managed by a team of experienced US managers. ‘It is able to use tools to buy or sell investments it does not hold (go short) which means the managers are able to potentially profit from expensive areas of the market,’ he says. He adds that the team has an excellent knowledge of wider economic picture in the US and use this to generate broad themes which are then used to guide stock selection ideas.
‘The fund has a growth focus but should also be able to protect investors in weaker markets. This late in the economic cycle a long/short fund is more sensible, as the quantity of shorting opportunities should be greater.’
Stevenson adds that having some bonds in your portfolio also makes sense, as they offer different qualities from equities and a mix of the two will smooth your investment ride. ‘Consider a strategic bond fund for added diversification, as these funds have the flexibility to invest across the bond spectrum.’
He says that both the Jupiter and the Fidelity Strategic Bond fund are worth a look.
Investors might also want to consider this Money Observer Rated Fund, which aims for wealth preservation and is managed by Peter Spiller. This trust is one of relatively few trusts that aim to produce an absolute return. This is not to say that it doesn’t go through periods of underperformance, but its long-term record is still exceptional.
Its portfolio is made up of equities, bonds and property with a small holding in gold.
This fund provides a built-in diversification and balance in one simple-to-access fund, according to Stevenson. It is managed by Ayesha Akbar, one of the most experienced investors in Fidelity’s multi-asset investment team.
The fund currently has just under 60 per cent of its assets in equities, nearly 30 per cent in bonds and the remainder in cash and other assets.
Lowcock points to this fund for capital preservation. He says the manager Iain Stewart’s first priority is capital protection and he then looks to deliver returns of 4 per cent above cash per annum over the longer term. ‘Stewart runs an unconstrained and flexible approach, which initially uses Newton’s thematic research to identify opportunities and to position the portfolio appropriately.’
The fund invests in two parts. A core element invests in shares and bonds with a long-term perspective and low turnover. Around the core, Stewart invests in cash, government bonds and derivatives in order to reduce risk.
Another fund to consider for capital preservation is this one. Lockcock says the team believe that global macro trends are the main drivers of returns for asset classes, and they look to identify and exploit these with the aim of delivering positive returns in all conditions and a priority on capital preservation.
‘Current themes include Japanese economic recovery, global political divergence, and China in transition. The fund will invest in cash, equities and bonds and will use derivatives extensively to short a sector.’