Funds and investment trusts that thrive in bull and bear markets

Is it possible to find all weather funds that can outperform in both rising and falling markets? Hannah Smith investigates.

Heavy selling in February and March left many investors nursing losses, on paper at least, as coronavirus panic swept through global stock markets. But some funds managed to limit their losses or even generate a positive return during the turmoil. Funds that try to protect investors’ capital during falling markets are called wealth preservation vehicles. When you buy these funds, the trade-off is that they will usually lag a rising market, so they can be quite a drag on your portfolio’s performance during a bull market.

But are there any funds out there that can perform well in all conditions – growing your money in a bull market and protecting it in a bear market?

A wealth preservation fund is any type of investment vehicle that states among its objectives an aim to limit losses in falling markets – quite a broad church of funds. Such vehicles include investment trusts; multi-asset, multi-manager and absolute return funds; and even bond funds that give themselves a defensive or capital preservation label.

Which funds limited their losses in the March sell-off?

Major stock markets fell sharply during March, with the peak to trough of the sell-off taking place between 19 February and 20 March. Investment platform AJ Bell crunched the numbers to find out which capital preservation funds delivered over the month as a whole.

In the investment trust space, two names managed to achieve a positive return: the Ruffer Investment Company (up 3.3% in March) and the Personal Assets Trust (up 0.8%). During the worst of the sell-off, both portfolios were negative, but they fell far less than the major indices, which plummeted by 30%.

The AJ Bell group’s personal finance analyst, Laura Suter, explains that both these trusts had large allocations to defensive assets going into the month, with Personal Assets holding around 20% in cash, a third of the portfolio in index-linked bonds and 9% in gold. Ruffer, meanwhile, had half its assets in bonds, cash and gold at the end of February.

But what is the opportunity cost of holding these funds for the long term? Over the past 10 years, Personal Assets would have given you a 77.4% return and the Ruffer trust 40.7%. This means Personal Assets has at least beaten its benchmark, the FTSE All-Share index, which returned 67.1% over the period. Both trusts have a global remit, but both have fallen far short of the 123% gain from the MSCI World index over the past decade’s bull market.

A pair of hand protecting a golden egg inside a nest


Absolute return no silver bullet

Absolute return funds were once touted as the perfect solution for investors who wanted to protect their capital and make a small positive return in all market conditions, but recent research has shown they have hardly even beaten inflation over the long term.

AJ Bell has found that, of the 38 funds with a 10-year track record, only one, the Janus Henderson UK Absolute Return fund, has managed to beat cash returns of 1.45% every year. Three funds failed to beat cash over that period, with two delivering a loss over the decade. In the past year, 26 funds out of 38 delivered a loss.

RiverPeak Wealth’s head of investment advisory, Shauna Bevan, says she and many other investors had high hopes for these funds, but have been disappointed. She says: “The Investment Association’s targeted absolute return sector was going to be a panacea for all ills, but actually the funds haven’t really delivered. You talk about risk-free returns, but after a while, we felt they were giving us return-free risk.”

The BNY Mellon Real Return fund, for example, has “a very decent long-term track record”, but it fell by 15.8% between 19 February and 20 March. “That’s quite a big drawdown for a fund,” says Bevan. “It would say it’s not going to be able to generate an absolute return in every single scenario, but over a three-year rolling period it would hope to generate an absolute return. It is up over three years, so it has achieved its objective, but it has barely kept pace with inflation.”

Bevan also points to the Jupiter Absolute Return fund, which has performed well over the same volatile period, down just 1.3%. But although it has managed to do its job and buck the trend in a heavy market sell-off, over three years it has fallen by 20.9%, which would be disappointing if you were a long-term holder.

She adds: “You’re still getting some downside risk with absolute return funds, but also a huge opportunity cost, because you’re getting no return. So I’ve really come full circle, having been quite an active user of these funds. Now I’m relying instead on traditional asset allocation to fulfil portfolio objectives.”

The worst of both worlds

Multi-asset and multi-manager funds appear a good solution for many investors looking for a one-stop shop where a professional fund manager takes care of the spread of investments in the portfolio. As the label suggests, a multi-manager fund invests in several other funds from different investment houses, while a multi-asset fund invests directly in individual securities such as bonds and shares, although it can also hold funds.

Vanessa Barnes, founder and chartered financial planner at Hannay Investments, has used multi-manager funds from Close Brothers and Jupiter’s Merlin range to help preserve clients’ wealth. She says: “Where these funds come into their own is in protecting downside and, especially if you’re in or near retirement, that is important.” However, she notes that some multi-asset funds don’t go up in rising markets and still fall quite a way in declining markets, so investors could get the worst of both worlds. With multi-asset and absolute returns funds of “variable quality”, investors need to look closely at the calibre of the manager, she says. (See our coverage of multi-manager funds in last month’s issue for more on this.)

Among the mixed-asset funds, Sophie Kennedy, head of investing at EQ Investors, highlights the Baillie Gifford Managed fund, a traditional managed portfolio that typically has about three-quarters of its assets in equities and a quarter in bonds.

She says: “If you want one fund that is going to give you equity market upside – but not too much – with a little bit of downside protection, that’s a good one.” However, she adds the caveat that the group has a very specific growth-oriented style and has done well out of technology stocks such Amazon and Facebook, so investors nervous about the performance of the FAANG stocks should be wary. That said, she adds: “On a five-year-plus view, Baillie Gifford has shown that it is pretty good at selecting the winners.”

James Sullivan, director and fund manager of wealth manager MitonOptimal UK, picks out the Troy Trojan fund and the LF Ruffer Total Return fund, “veteran flag-bearers for the multi-asset sector”, which have once again proved “robust and resilient” during the recent volatility. The multi-billion pound Invesco Global Targeted Returns fund has also held up well during the worst of the correction.

An umbrella deflecting downward arrows away from a bag of money


Comfort zone

A key aspect of investing is that you never know what is around the corner. Sudden market downturns can surprise even the most seasoned investor. With that in mind, should you always keep a wealth preservation fund in your portfolio as a comfort blanket just in case, even though it might weigh on performance when equity markets are buoyant?

Kennedy has held Troy Trojan in her best ideas portfolios for a long time and has been increasing exposure in the past year. Although the fund is likely to lag in a market rally, for her it is still worth holding as a defensive part of a diversified portfolio. “This is the part of our portfolio we’re not relying on to generate returns. It’s really there to diversify for exactly this kind of period,” she says.

“If we have concerns about where the market is going, it is definitely something we would increase our allocation to.”

Investors need to think about what role they expect funds such as these to play in their portfolios and also consider their investing time horizon. Where they can afford to take a long view, holding a growth fund that falls more in sell-offs but has time to recover could be a better strategy than holding a wealth preservation fund. The extra return the former gives you in the good times should offset those heavier falls.

However, if you don’t want to look at a timescale of more than three to five years, this strategy may not work, as the growth portfolio may take three years to show you a recovery from a downturn.

Sullivan says investors should ask themselves why they have bought a particular fund. If the investment case still stands and the fund continues to serve a purpose, there’s no good reason to sell it, he argues.

That said, as investors move towards retirement, for example, they may want to reduce their equity risk and shelter in a fund that can demonstrate lower drawdown (the amount it falls peak to trough) and lower volatility. Sullivan adds: “A bull market can often suck investors further up the risk spectrum than they intended to go, through fear of missing out.”

Back to basics

The reason why some safe-haven assets such as gold and government bonds fell in tandem with equities on some days during the recent sell-off was that investors were fleeing to cash.

That’s because cash is the ultimate port in a storm, so perhaps risk-averse investors should just run higher cash positions now as ballast against future volatility. Bevan suggests that a cash/equity ‘barbell’ approach might be the right strategy for capital preservation, with, say, 70% in equities and a large buffer in cash. Kennedy concurs. “Our view is that cash is obviously the safest way to preserve your wealth,” she says.

Another option to reduce risk in portfolios generally is to look for funds holding quality companies with strong balance sheets and recurring revenues operating in less cyclical sectors. You could also look for uncorrelated alternative funds and assets – EQ Investors uses MontLake Dunn, a data-driven, trend-following strategy much like a hedge fund but in a Ucits structure (retail investors can access it through fund platforms).

The top-performing funds over the recent sell-off were largely global bond funds – some returned 7% or 8% from February to March. This should remind investors why diversification is so important and why they should hold both equity and bond funds.

“It comes down to basic lessons, such as that diversification is the key quality you need – in assets, fund managers and geography – and that the rules don’t change whether it’s a bull or a bear market,” says Barnes. “There is nothing out there, no one fund you can buy that will do all things in all markets and circumstances.”

There is no investment holy grail, so finding the right balance in portfolios by combining funds is probably the way to go. By all means hold a wealth preservation fund, but don’t put all your eggs in the wealth preservation basket and miss out on stock market recoveries.

Investment trust options

In the investment trust space, other portfolios that explicitly state that they aim to preserve capital are RIT Capital Partners and Capital Gearing Trust. During the sell-off, Capital Gearing shed 8.2% (-2.8% in the month of March). Over 10 years, it is up 71.4%. RIT fell by 28.9% in the four weeks of the sell-off (-4.2% in March). It has returned 100.7% over the past decade. That means both trusts have beaten the UK market in the long run.

Sophie Kennedy at EQ Investors has been adding to the firm’s long-held position in RIT over the past few weeks. She likes the trust’s ability to use futures and options to reduce its net equity exposure when it thinks market conditions will get tough.

Selected funds and trusts to consider for a wealth preservation strategy 

      Total return (%) over:      
Fund / trust name 19/02/20 to 20/03/20* 1m 1yr 3yr 5yr 10yr
Ruffer Investment Company 1.6 5.8 12.7 4.4 14.3 40.7
Jupiter Absolute Return -1.3 -1.2 -13.8 -20.9 -14 -9.2
LF Ruffer Total Return -2.6 3.5 9.2 6.9 14.7 55.8
Invesco Global Targeted Returns -2.8 2.4 1.6 -2.8 0.9  
Janus Henderson UK Absolute Return -3.1 1.7 2.5 2.1 9.3 45.7
MontLake Dunn WMA Institutional UCITS -3.1   4.6 8.5 25.1  
Architas Multi-Manager Diversified Protector 85 -4.7 -0.1 -1 1.7 2.7  
TwentyFour Monument Bond -6.1 0.5 -4.3 -0.8 2.4 19.6
Troy Trojan -7.2 4.4 7 9.6 25.9 60.5
Personal Assets Trust -8.1 6.7 8.5 12.3 33.4 77.4
Capital Gearing Trust -8.2 2.6 3.5 13.5 32.5 71.4
Jupiter Merlin Real Return -10.6 4.2 0      
Close Diversified Income Portfolio -15.6 6 -3.4 -0.2 10  
BNY Mellon Real Return -15.8 4.5 0.7 5.4 7.8 34.6
Baillie Gifford Managed -17.0 9.8 4 20.9 45.9 120.4
RIT Capital Partners Trust -28.9 7.2 -9.9 5.1 27.2 100.7
FTSE 100 index -29.8 10.8 -14.4 -3.9 7.7 59.2
MSCI World index -31.8 13.5 -2.7 16.9 29.9 123.1
FTSE All-Share index -31.3 11.5 -14.2 -4.5 8.5 67.1
S&P 500 index -31.83 15.8 1.3 28.5 49.9 181.8

Notes: *Ranked by period of main Covid-19 related market falls. Source: FE Analytics, SharePad, as at 29 April 2020


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