The funds and trusts that look beyond gold to add defensive ballast

Jument Lighthouse, off Brittany, France, is struck by a huge wave during a storm. Credit: Mathieu Rivrin/Getty Images.

Gold is a safe bet in risky times, right? Well, tell that to investors who saw the gold price tumble more than 5% in a single day in late October shortly after hitting an all-time high.

The recent ups and downs of gold are a reminder that while the precious metal is widely perceived as a safe-haven asset – valuable in these unpredictable times – it can often be volatile.

If you’re currently anxious that global stock markets’ bull run could come crashing down, it makes sense to consider multiple strategies asset classes for adding defensive ballast to your portfolio.

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“Historically, gold’s volatility can be even worse than equities and unlike, equity funds, it offers no underlying company earnings, no income and no inherent growth – its value depends entirely on someone being willing to pay more for it later,” agrees Scott Gallacher, a chartered financial planner and director at independent financial adviser Rowley Turton.

“Consequently, I’d prefer that if gold is used at all in a portfolio, it’s as part of a diversified multi-asset fund where the manager has the flexibility and expertise to judge the timing and appropriateness of the gold exposure – and can react quickly to changing market conditions.”

Diversification, in other words, is the name of the game. But how to achieve that in your own portfolio? In practice, there are several different options to move your defensive strategy beyond dependence on gold – particularly with the gold price still so elevated by historical standards following the rally of recent months.

Wealth preservation investment trusts

One possibility is an investment trust from the Flexible sector. Rather than focusing on a particular asset class or stock market, managers of these funds are free to invest across a range of areas. They may well carry some equity exposure, but other holdings may include fixed-income assets, real estate, commodities – including gold – alternative assets and even cash. When managers are wary about equity market volatility, they can increase their exposures to these holdings to provide shareholders with some protection.

The best-known funds in this category include Capital Gearing Ord (LSE:CGT), Personal Assets Ord (LSE:PNL), RIT Capital Partners Ord (LSE:RCP) and Ruffer Investment Company (LSE:RICA), all of which are currently positioned relatively defensively, with significant holdings in bonds, property and cash – and, in some cases, gold too.

JP Morgan Cazenove investment trust analyst Christopher Brown is a fan of Ruffer in particular. “Ruffer’sportfolio looks even more defensive than in prior years with close to half of net assets in cash and short-dated nominal bonds offering it a high degree of liquidity,” he explains. “It remains a good pick for investors who seek a diversifying investment which has low costs.”

The investment trust’s policy of buying in its own shares when they’re trading at unduly wide discounts to the value of its assets is also useful, Brown says.

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In the open-ended universe, meanwhile, the Mixed Asset and Flexible Investment funds sectors offer a range of similar vehicles, with managers free to hold a spread of assets – although often subject to maximum or minimum percentages of the total portfolio value in each case.

Here, Gallacher picks out the MI Hawksmoor Vanbrugh fund, noting it has consistently delivered first-quartile performance. More than a fifth of the fund is currently invested in “real assets” – infrastructure, precious metals, property and shipping – and more than a quarter is in bonds. “The allocation to physical gold is around 5% but you’ve also got other real assets in the portfolio,” says Gallacher.

Elsewhere, Dzmitry Lipski, head of funds research at interactive investor, suggests risk-focused investors should investigate absolute return funds. These are vehicles that aim to generate positive returns whatever might be happening with markets – typically using strategies such as derivatives investment, short selling and leverage, which conventional funds wouldn’t consider.

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Such funds aren’t guaranteed to stay in the black – and some are quite costly – but they don’t tend to follow market benchmarks up and down in the same way as traditional investment vehicles. “Some invest only in a single asset class, such as equities or bonds, or in a single geographical region,” Lipski explains. “But many are multi-asset funds, with holdings in equities and bonds as well as in commodities, currencies or property, and they’re often global.”

Lipski is a particular fan of Trojan Fund run by Troy Asset Management. “Seeking to protect and grow capital, it is cautiously run, with a focus on downside protection and quality,” he explains. “Allocation is flexible and currently defensively positioned.” Indeed, close to half the fund is currently invested in government bonds, including US Treasuries and gilts, with gold accounting for more than 10% of the portfolio.

Another option, adds Lipski, could be the TM Fulcrum Diversified Absolute Return fund. “Its return profile is quite uncorrelated with global equity or bond markets,” he says. “While the fund did suffer a period of weakness around 2016-18, it hasn’t produced a negative return in any calendar year since then.”

Spread risk far and wide

It’s not essential to get all your diversification from a single vehicle. Investors also have the option of eschewing the multi-asset approach in favour of adding exposure to individual asset classes for themselves. That would mean looking beyond equity and bond funds into other areas of the market – including real estate and commodities, say, but also into alternative investments.

Ben Yearsley, an investment consultant at Fairview Investing has a couple of funds in mind that could fit the bill for alternatives exposure. “International Public Partnerships Ord (LSE:INPP) investment trust invests in major infrastructure assets such as the new Thames super sewer and the Sizewell nuclear power station development,” he explains. “It offers a yield of 6.5% and the large majority of its income stream is linked to inflation.”

Another option Yearsley likes is the Polar Capital Global Insurance fund, which has delivered average annual returns in excess of 10% over the past 20 years. “It invests in speciality insurance business mostly listed in the US,” he says. “As well as making money on underwriting the fund earns returns on the assets that it owns, typically short-dated US Treasury bonds, which have a healthy yield today.”

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One final point. While diversification provides some protection against volatility in any one asset class, the reality of the current investment environment is that every asset class is vulnerable to uncertainty and unpredictability. For example, global bond markets – like their equity counterparts – have also been on a strong run in recent months, with many investors now concerned this may not be sustainable.

In this context, argues Philippa Gee, the managing director of Philippa Gee Wealth Management, it’s not enough just to think about where you want to be invested right now. You also need to be disciplined about investment planning and portfolio management.

“Go back and check your portfolio to make sure you are not taking too much risk because your allocations may have become distorted in recent years as returns have changed,” Gee advises. “Think again about when you might need to take money out of funds; be sure you have access to any money you might need for the short term; and double check you are making the most of tax advantages, a point you may need to re-evaluate after November’s Budget.”

As for gold, there is a place for the precious metal in a defensive portfolio, but both existing and new investors face a related problem. For the former – and to Gee’s point on allocations – the 25% appreciation seen in the gold price in the past two months alone means your holding will now account for a significantly larger chunk of your portfolio than you may have intended. For the latter, the gold rally may now have run its course, particularly since we’re at the end of the Diwali season, when Indians’ demand for gold traditionally eases back.

In which case, it will be even more important to think more broadly about risk mitigation.