Seven funds protecting capital and making hay when markets rise

Over time stock markets ebb and flow, but for those willing to stay the course and not panic-sell in choppy periods there’s a good chance of achieving inflation-beating returns.

To improve your chance of investment success, one of the golden rules is to spread risk by having a diversified portfolio. This can be achieved through holding a mix of different assets, principally shares, bonds, property, infrastructure and commodities.  

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

In the case of funds, it is also important to strike an appropriate balance between risk and reward. If you have too many adventurous investments, the likelihood is that when stock markets fall out of form, your portfolio will take a heavy tumble. However, if you have a portion of your portfolio in defensive funds, then it is more likely that you will have a smoother ride when the inevitable bumps in the road occur.

One way to achieve some defensive ballast is through multi-asset funds that invest in a cautious manner by not betting the house entirely on shares. Instead, such funds typically have more in bonds and other assets.

There are three main sectors, with the two fund options being the Investment Association (IA) Mixed Investment 0-35% Shares and Investment Association Mixed Investment 20-60% Shares. For investment trusts, it is the Flexible Investment sector.

Such funds serve a very useful purpose, as, in theory, they deliver protection in falling markets. However, it is important to avoid dedicating too much of your portfolio to them, as other funds offer greater growth potential. In a separate feature on cautiously managed multi-asset funds, a couple of wealth managers suggested that about 10% in such funds would be appropriate for a typical ‘balanced’ investor.In addition, by attempting to preserve capital, some of these funds may not deliver satisfactory total returns.

With this in mind, in the final article in our mini-series on funds that limit losses in falling markets while delivering table-topping returns, we examine three defensive multi-asset sectors. You can read the other two articles in our series by following the links below.

• UK and global funds topping the charts while limiting the big dips
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The criteria

To measure downside protection, we looked at each fund’s “maximum drawdown” over the past five years. This measure calculates the most that an investor would have lost if they bought and sold at the worst possible times during the period, which included the Covid-19 market sell-off in the first quarter of 2020.

To find funds that achieved top returns while limiting downside risk, we screened for best performers in terms of total returns over the past five years.

We then looked at maximum drawdown over the same period, and retained the funds that were among the best in the sector on this measure, due to having the lowest percentage falls.  

Finally, we stripped out any funds not available to interactive investor customers.

The funds and trusts that came up trumps

As the Mixed Investment 20-60% Shares sector contains a lot more funds than the Mixed Investment 0-35% Shares sector, 184 versus 65, we filtered for the top 10% of funds for the former, and top 20% of funds for the latter.

Once those filters had been applied, just four funds remained: Premier Miton Defensive Multi Asset, Ninety One Diversified Income, LF Ruffer Total Return, and Waverton Multi-Asset Income. 

When comparing the sector average returns for those two fund sectors, there’s not much in it in terms of the maximum drawdown measure. However, for total returns the Mixed Investment 20-60% Shares sector has notably outperformed the Mixed Investment 0-35% Shares sector. Therefore, this fund sector has delivered a better outcome over the past five years in terms of delivering high returns and providing a similar level of protection.

Source: FE Fundinfo. Data from 1 August 2018 to 1 August 2023. Past performance is no guide to future performance.

As the above table shows, multi-asset investment trusts have a much higher maximum drawdown figure over the past five years.

There are two main reasons for this. One is that some trusts have more exposure to equities than the maximum limits of 35% and 60% for the two fund sectors. Second, as investment trusts have two values, the net asset value (NAV) and the share price, the latter often takes the strain when there’s a market sell-off as nervous investors sell. Therefore, when stock markets suffer a heavy fall, such as during the Covid-19 pandemic, investment trusts underperform funds on a like-for-like basis.

As there are 20 constituents in this sector, the parameters were widened to screen for the top 25%. In other words, funds need to be in the top five in the sector for five-year returns, and also in the top five for the lowest maximum drawdown.

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The three that achieved this were Personal Assets (LSE:PNL), Capital Gearing (LSE:CGT) and Ruffer Investment Company (LSE:RICA). This trio have a reputation for being wealth preservation vehicles, and over the past five years this has been the case. Providing the best mixture of protecting capital and making solid returns was Personal Assets, which has a maximum drawdown of -8.8% and a five-year return of 25.2%. Each trust invests in a variety of defensive assets, including small weightings to gold, which is viewed as a safe haven in times of uncertainty.

However, it is important to bear in mind that it is not always plain sailing with wealth preservation trusts. As our recent article pointed out both Ruffer Investment Company and Capital Gearing have been out of form so far in 2023, down -12.9% and -7.8%. Personal Assets has held up better, down -2.3%. 

The short-term performances of Ruffer Investment Company and Capital Gearing have been hindered because safe havens of any description have been few and far between during the past 18 months. The past year’s run of rate hikes rapidly impacted a whole range of assets, and in particular fixed-interest investments, which have historically been a reasonable hedge against falling equity prices. 

The seven funds that made the grade

Source: FE Fundinfo. Data from 1 August 2018 to 1 August 2023. Past performance is no guide to future performance.