Recession-proofing a portfolio: shares and funds that fit the bill

We run through ‘recession-resistant’ shares and highlight the types of fund that fit the bill for investors looking to reduce risk and add some defensive ballast to their portfolio. 

Even under an optimistic scenario, where the gradual easing of lockdowns in Europe proves to be a success and avert the triggering of a second wave of coronavirus cases, the global economy is clearly heading towards recession. What is uncertain is how deep and long the recession will be.

This part of the market cycle throws up plenty of challenges for investors, but during such times, while there will be plenty of businesses under the cosh, some firms will be relatively immune to the wider economic malaise. Below we run through ‘recession-resistant’ shares from two fund managers who for some time now have been building a large position in defensive growth business in their respective funds.

Separately, we also highlight the types of fund that fit the bill for investors looking to reduce risk and add some defensive ballast to their portfolio.

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Recession-resistant shares

James Thomson, manager of the Rathbone Global Opportunities fund, has since last summer adopted a more defensive stance than usual in his portfolio, amid concerns over the slowing global economy.

He allocates anywhere between 15% and 25% to recession-resistant businesses, those companies that are not as closely linked to the economic cycle or where demand is more predictable. He has currently maximised exposure to defensive names, holding 25% in such businesses.

This part of the portfolio, which Thomson describes as containing “weather-proof businesses”, ensured Rathbone Global Opportunities managed to limit losses and outperform most global funds during the market volatility. Figures from FE Analytics show the fund’s performance is flat since the start of 2020, whereas the average global fund has lost 8%.

Thomson says: “The weather-proof businesses have overall done their job in being a good buffer for the fund over the past couple of months.”

Looking ahead, Thomson believes such stocks are well placed to continue outperforming the wider market.

He picks out Hermès, the Paris-listed luxury goods company, as one example. The firm reopened its flagship Chinese store in Guangzhou in mid-April and sold made over $2 million in sales in a single day. “It has a resilient business model, with the power of scarcity attached to its Birkin Bag,” Thomson adds.

Other defensive names he likes are Ocado, the UK grocer, and US technology giants Netflix and Amazon.

He adds: “For all of these businesses, coronavirus is accelerating existing trends. For Ocado there’s been an increased shift towards online grocery, while for Netflix there’s been greater demand for online viewing and Amazon is benefiting from a rise in e-commerce and cloud computing.”

A new holding Thomson has introduced for the "weather-proof” segment of the portfolio is TeamViewer, a German technology business that provides remote working solutions. In the event that working from home becomes more widely accepted by businesses following the lockdown period, this is a firm that’s poised to benefit.  

Simon Edelsten, co-manager of the Mid Wynd International investment trust, agrees that the market-leading stocks during the sell-off in the first quarter are well positioned to continue their dominance in a recessionary environment.

He says: "Companies that cope well with economic recessions tend to have the following characteristics: a must-have product that people keep buying even when money is short; comfortable profit margins to mitigate the impact of fierce competition in slowdowns; and a strong balance sheet – preferably debt-free – so that stable cash flows come to shareholders without bank interest taking a large cut.

"In our portfolio such investments have performed relatively well in recent weeks. For instance, Colgate Palmolive, demand for whose products is pretty consistent through boom and bust, also has only $8 billion of debt compared with $60 billion of equity value, so it is financially very secure.”

Edelsten also picks out Swiss pharamecutical giant Roche, and Equinox, US leader in data centres. "The revenues of drugs companies such as Roche can rise and fall as new drugs are launched and others mature, but again with only SFr15 billion of debt and SFr300 billion of equity it is a financial fortress, and also a world leader in virus testing equipment.

“In a similar ilk, Equinox has only $13 billion of debt and $60 billion of equity, so it’s very financially robust.”

He adds that Roche and Colgate are offering dividend yields around the 2.5% mark. “They are not high dividends, but perhaps secure dividend income is more important in a difficult environment,” says Edelsten.

Defensive funds: the types to consider

Global funds that focus on or have a notable amount of exposure to defensive growth businesses, such as Rathbone Global Opportunities and Mid Wynd International investment trust, held up well during the first quarter of 2020. Other global funds that also managed to limit losses included Fundsmith Equity and Trojan Global Equity. All four funds are Money Observer Rated Funds. 

Other defensive funds options to consider include wealth preservation investment trusts, which prioritise protecting investor capital and invest on the principle that they would sooner keep £1 rather than risk losing it to try and win £2. 

The four trusts that meet this description are Capital Gearing, RIT Capital Partners, Ruffer Investment Company and Personal Assets. Each has a low weighting to equities and plenty of defensive armoury, such as low-risk inflation-linked bonds and a small weighting to gold.

Other defensive options include multi-asset funds. Owing to their greater levels of diversification, should be better equipped to weather a market storm than equity funds that either invest globally or focus on a particular region. 

In addition, there are also absolute return funds and volatility managed funds.

Money Observer recently considered how each of these defensive fund types performed during the worst period of the market sell-off in February and March; the results were mixed, with some funds not managing to their job in protecting investors’ capital. Read our analysis here.