Fund Focus: where to hide in the market sell-off?

Diversify, diversify, diversify. That’s a message the industry gives investors in anticipation of the next equity market sell-off. But every sell-off is different – and not every diversifier works in each one. 

Markets have shown obvious signs of stress since conflict broke out in the Middle East in late February, with European and emerging market shares suffering in particular. And, upsettingly, most diversifiers appear not to be working for now – with a few exceptions. 

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What has worked? 

I won’t labour a point I made a few weeks ago, but your classic safe havens are not doing their job right now. 

Government bonds dislike inflation and hate the prospect of interest rate rises, meaning they have broadly struggled in recent weeks. 

Gold has behaved like a frothy momentum play in the last year and seems to be now paying the price: the metal’s price has tumbled recently, likely reflecting the fact that investors are taking profits on it as they look to free up cash.  

That has been painful for the iShares Physical Gold ETC GBP (LSE:SGLN), and extremely nasty for funds focused on gold miners such as Jupiter Gold & Silver I GBP Acc and Ninety One Global Gold I Acc £. 

Source: FE Analytics. Past performance is not a guide to future performance. 

A few names are offering investors a port in a storm, but they are pretty niche.  

If we dip into the alternative assets universe, a clogging up of trade routes has done wonders for the leasing investment trusts. The plane leasing fund Amedeo Air Four Plus (LSE:AA4) is massively up (28.2% over the past month), while Tufton Assets Ord (LSE:SHIP), a favourite of our columnist Ian Cowie, has also made money in the crisis, up 2% over one month.  

Those aren’t the obvious funds you might use for diversification, although this does fit the idea that even niche equity exposures sometimes offer a bit of ballast, as people sometimes argue for funds such as Polar Capital Global Ins F Acc. 

If we look at the more obvious “defensive” funds, some have managed to limit the damage to your portfolio – although that’s definitely not universally the case. 

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Weathering the storm 

I’ve looked at a multitude of funds you might consider defensive, from the widely followed “wealth preservation” trusts, to the hedge fund vehicle BH Macro GBP Ord (LSE:BHMG), gold, government bonds and a handful of names in the flexible bond, absolute return and multi-asset universe.

Source: FE Analytics. Past performance is not a guide to future performance. 

It’s a niche name, Neuberger Berman Uncorrelated Strategies GBP P AccH, that has actually made money since late February.  

It focuses on absolute positive returns over a market cycle, usually three years, from a diversified portfolio of “uncorrelated investment strategies”. In practice, it can end up making bets on the direction of things like currencies, bonds and stock markets. It recently appeared to have a big bet on the price of the Japanese 10-year government bond falling, for example. 

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I have mixed feelings on names like this and BH Macro, which also sits in the table.  

They can sometimes really work well in portfolios: when stocks and bonds tumbled in 2022 we saw both funds make gains of around 20%, for example.  

But they can suffer when equity markets are buoyant, and they are fundamentally difficult for DIY investors to analyse or understand. You are, to an extent, taking a leap of faith here. 

Wealth preservation trusts 

Better known to us are the wealth preservation trusts, and the results are mixed here. Ruffer Investment Company (LSE:RICA), which has a big position in short-dated bonds but also tends to use instruments such as options, is down by 1.3% on a share price total return basis, with a similar result for Capital Gearing Ord (LSE:CGT). 

It’s notable that Personal Assets Ord (LSE:PNL)’ shareholders are down by almost 7%, putting them in line with some of the equity market losses we’ve seen. 

We recently outlined their broad asset allocations and that table is reproduced below.

But to explain some of their differing performance, Ruffer has a big exposure to government bonds but a massive chunk of this is short-dated, something which will limit its sensitivity to changes in interest rates. 

Capital Gearing has a lot of exposure to index-linked government bonds, which can help at a time of rising inflation expectations.

Source: recent factsheets.

Personal Assets has likely struggled for two reasons: its fairly big gold allocation, combined with its exposure to some shares, from Alphabet Inc Class A (NASDAQ:GOOGL) to Unilever (LSE:ULVR), that have taken a battering in the last month. 

The wealth preservation trusts in particular need some due diligence if we are to enter another period dominated by inflation and higher interest rates.  

Investors might also want to consider real assets (from commodities to property and infrastructure) as part of their toolbox, and not be afraid to look at more niche holdings as possible diversifiers.