Top 13 funds and trusts for fearful investors
13th November 2013 10:58
by Tanzeel Akhtar from interactive investor
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With global markets at multi-year highs and an end to loose monetary policies on the horizon, how can investors fearful of a crash protect their capital?
Tony Yarrow, investment manager at Wise Investment addresses the concerns of investors who are worried about the current high level of the stockmarket, and are afraid that prices could fall substantially, leading to a loss of capital.
Yarrow says: "It is worth mentioning that the FTSE 100 index is still around 3% below where it was at the end of 1999, 14 years ago. It has been a lot more expensive at times in the past.
"The investors who do best tend to be the ones who hold assets for the long term and own assets in which they have enough conviction to hold on through the difficult times. Good assets tend to come through the bad patches strongly and recover quickly afterwards."
He suggests that investors who are worried about an upcoming market correction could hold cash in anticipation of a return to the market at a lower level.
Alternatively, Yarrow recommends looking for fund managers who are expecting difficult market conditions and have taken steps to anticipate them.
First on his recommendation list in the UK All Companies sector is the £1.2 billion managed by John Wood and Ben Leyland and the £1 billion managed by Alastair Mundy.
The investors who do best hold assets for the long term and own assets with enough conviction to hold on through the difficult times."Tony Yarrow
He says: "These funds have become very selective, investing only in those companies where they see robust business models, strong finances, and good value at current price levels.
"The managers are also holding significant levels of cash, around 20% of the fund value in the case of JO Hambro and 10% for the Investec fund," he adds.
Yarrow says he has also been buying : "Infrastructure funds invest in reliable income streams from investments in assets such as schools, hospitals and motorways.
"These income streams are on long-term contracts with reliable counterparties, and do not rely on the level of the stockmarket, or on the prospects for economic growth. Such investments tend to be seen as ‘safe havens' at times of market crisis, though one couldn't guarantee that the same would happen in future," he adds.
Quoted infrastructure funds all stand on premiums to their asset values, but the dividend yield - all at or above 5.0% per annum - are attractive and it can be argued that the discounted cash-flow models used to value the assets are overly harsh. If a lower discount rate is used, the premiums disappear.
Another fund investors might consider is . Yarrow says the fund owns carefully-selected floating-rate notes, these are contracts where the borrower pays an interest rate which is linked to the base rate.
In an environment of rising interest rates, the income from the floating-rate notes should also rise, making them more attractive, and which might protect the capital values against undue loss.
Risk of rising interest rates
Jeremy Le Seur, managing director at 4 Shires Asset Management, says the problem with traditional defensive investments is that, in the era of low interest rates, the risk of rising interest rates makes bonds unattractive.
He explains: "A bond portfolio held to maturity mitigates the interest rate risk, but few if any bond funds would do this. Gold is also suffering at present from central bank sales and the removal of investor activity."
Le Seur believes high-yielding equity investment trusts offer protection against inflation and add international diversification.
He suggests the following three closed-ended vehicles.
The £373 million managed by Job Curtis aims to provide long-term growth in income and capital, investing in UK equities. Over one year, the trust has returned 25.6% compared with an average of 31.9% for the UK Growth & Income sector as at 11 November.
Cash is the only truly defensive asset in this environment and that means you have to commit to returns below inflation, which doesn't do anybody any good."Jeremy Le Seur
Next we have another Henderson Global Investors-managed trust, the £328 million .
Managed by Michael Kerley, the trust aims to provide a high level of dividends, as well as capital appreciation over the long term, from a diversified portfolio of investments traded on the Pacific, Australasian, Japanese and Indian stockmarkets.
Over one year, the trust has returned 14.4% compared with an average of 12.5% in the Asia Pacific excluding Japan Equities sector as at 11 November.
The third trust recommended by Le Seur is the £794 million managed by Charles Luke. The trust is 97% allocated to UK equities and top holdings in the trust include , , , , , , Roche, and .
Le Seur adds: "Cash is the only truly defensive asset in this environment, and that means you have to commit to returns below inflation, which doesn't do anybody any good. A balanced portfolio of income-focused equities and bonds held to maturity offer a reasonable defensive outlook.
"The more defensive the portfolio, the higher the percentage of fixed interest held to maturity. Should things become irrationally exuberant in equities, a switch from equities to cash would protect assets in the short term. Too long in cash and one begins to lose purchasing power," he explains.
Four pillars
Gordon Smith, fund analyst at stockbroker Killik & Co, suggests Troy Asset Management's managed by Sebastian Lyon.
Smith explains the portfolio is broadly split into four pillars: blue-chip equities (25%) with a focus on global corporates with high margins, strong franchises and leading market positions; gold & gold mining equities (14%) held to protect against an environment of negative real interest rates; index linked bonds (26%) held to protect against ongoing inflationary policies instigated by the major central banks; and cash and liquidity (25%) held in order to keep "powder dry" in order to take advantage of better opportunities as they arise over the medium term.
The top 10 holdings in the Trojan fund include the ETFs Gold Bullion and ETFs Physical Gold exchange traded products, British American Tobacco, , Imperial Oil, , , , and .
Smith says: "A key attraction of this fund is the well-considered portfolio construction with portfolio constituents continuing to show low levels of correlation with each other, evident in the low overall volatility exhibited, and therefore offering attractive diversification benefits in an uncertain world."
Killik's Smith also recommends closed ended company . The London-listed feeder fund invests in the Brevan Howard Master Fund.
The investment objective of Brevan Howard Master Fund is to generate consistent long-term appreciation, with low volatility, through active leveraged trading."Gordon Smith
The Master Fund is as an open-ended investment company, incorporated in the Cayman Islands and launched on 1 April 2003.
Brevan Howard Master Fund exposure is predominantly to global fixed income and foreign exchange markets, employing a combination of global macro and relative value trading strategies.
Smith says: "BH Macro typically performs well in times of heightened bond-market volatility and periods of increased market stress. The investment objective of Brevan Howard Master Fund is to generate consistent long-term appreciation, with low volatility, through active leveraged trading."
"Whilst recent years have been difficult for global macro trading strategies due to central bank intervention suppressing volatility and interfering with fundamentals, the fund has continued to generate positive returns.
"The fund trades at around a 2% discount to NAV [net asset value] and has a strong set of discount control protections which should limit this rating widening," he explains.
What might cause a sell-off?
Ben Gutteridge, fund analyst at Brewin Dolphin, believes it is important to question what might cause the sell-off: is it the improved economic data triggering a faster than expected withdrawal of central bank liquidity?
In the current environment, Gutteridge suggests the following open ended investment offerings; firstly the £925.3 million , which is an absolute return fund focusing on fixed-income investing.
Gutteridge explains a conscious bias of the fund is to favour credit exposure. The fund is managed by Paul Brain, Howard Cunningham and Parmeshwar Chadha. Over one year, it has returned 2.1% compared with an average of 6% for the Targeted Absolute Return sector as at 11 November.
The majority of the interest rate risk associated with bond fund investing has been hedged out by derivatives, so the fund is less vulnerable to capital losses if bond yields rise."Ben Gutteridge
He says: "This facilitates delivery of a competitive level of income but is also supported by sound fundamentals such as a gently-improving global economy and the strength in corporate balance sheets.
"The majority of the interest-rate risk associated with bond fund investing has been hedged out by derivatives. This means the fund is less vulnerable to capital losses if we see bond yields rise. Equities should ultimately win out in the above scenario but volatility in the short term could prove too painful for many."
He highlights a different scenario where there is a significant resurgence in deflationary pressures. In this scenario, economic growth will sharply lose momentum. In this environment he would suggest the £911 million fund.
Capital preservation a priority
John Newlands, head of investment companies research at stockbroker Brewin Dolphin, believes one investment trust that places capital preservation high on its priority list is .
He says: "An unusual vehicle in that its management is overseen from a relatively anonymous Edinburgh Newtown flat and yet which has a market capitalisation of not far short of £600 million."
The Personal Asset Trust is advised by Troy Asset Management's Sebastian Lyon and run expressly for private individuals for whom maintaining the value of their investment is the overriding requirement.
Newlands warns that this is not a vehicle for smaller portfolios given that its shares are priced at more than £330 each.
The overall objective is to produce positive returns under a range of market conditions."John Newlands
His second choice is the £218 million , managed by Steve Russell and Hamish Baillie. It applies an absolute return philosophy, while using a long-only investment approach without utilising leverage.
Mostly conventional asset classes are utilised including global equities, bonds, currencies, funds and gold.
Newlands says: "The overall objective is to produce positive returns under a range of market conditions. As a consequence the trust will at times lag the main market on the way up but should prove resilient in flat or declining markets.
"UK and US index-linked government bonds are the cornerstone of the portfolio, accounting for nearly a third of assets, albeit there is also a significant allocation to large, global companies with strong cash flows and growing dividends, including telecommunications and pharmaceuticals."
Over 20% of the Ruffer Investment Company portfolio is invested in Japanese equities, bought on the basis that they should benefit from monetary stimulus and a weakening currency. There is also around 7% exposure to gold and gold mining equities.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.