BLOG: Five defensive funds for your ISA
With the threat posed by coronavirus having subsided for the time being, we’re now facing the prospect of a prolonged war following Russia’s invasion of Ukraine. How this will affect markets over the longer-term is unclear. Much will depend on how long the conflict lasts and the effect of economic sanctions imposed by western nations.
Against such a backdrop, it’s understandable that investors may be concerned about where to invest as we approach the end of the tax year and the annual ‘ISA season’. And this anxiety may fuel a desire to invest more defensively. The idea of such a strategy is to put money in asset classes or sectors that can deliver even during challenging market conditions.
So, what constitutes a defensive fund? Here we suggest five portfolios with different approaches that may be worth considering.
1) SVS Church House Tenax Absolute Return Strategies
This fund has an absolute return objective, meaning it aims to make money for investors over rolling 12-month periods. It also seeks to do so with low levels of volatility. It’s a ‘Steady Eddie’, mixed asset portfolio in which the managers, James Mahon and Jeremy Wharton, place a heavy emphasis on capital preservation.
The portfolio embraces diversified exposure to a wide range of assets, including fixed interest securities, equities, money market instruments, and cash deposits. However, there is no fixed allocation for any individual asset class. The managers will maintain the mix in whatever way they feel is consistent with the fund’s objective.
Obviously, with the goal of capital preservation in mind, they may decide to hold a higher proportion in either cash or other lower-risk assets. Another attraction of the fund is its longevity. It was launched prior to the 2008 financial crisis so has been managed through the good times and the bad.
2) LF Ruffer Diversified Return
This fund has declared it has a simple aim: consistent positive returns, regardless of how the financial markets perform. It means this is another portfolio with an absolute return mindset – but one with the protection of capital at the heart of its process.
It is designed to protect and grow the value of its assets, which means avoiding large losses and harnessing the power of compounding over time. It has a broad spread of assets, including index-linked gilts, cash, gold, short-dated bonds, and options, as well as equities from the UK, North America, Japan, and Europe.
While only launched relatively recently, the wider Ruffer Investment Strategy, on which it is based, has enjoyed success for almost three decades. This means the process has been used to steer through major market turbulence such as the dot.com bubble, the global financial crisis 14 years ago, and the recent Covid-19 pandemic.
3) Artemis Target Return Bond
This is a lower risk option for investors who want to earn a better return than they’d usually receive on cash, but without the volatility associated with investing in equities. Its managers, Steve Snowden and Juan Valenzuela, aim to achieve a positive return of at least 2.5% above the Bank of England’s base rate over rolling three-year periods.
The fund invests in bonds of any currency – directly or indirectly – and may also use derivatives to help achieve its objective. This means its assets can include government bonds, corporate bonds, asset-backed securities, and mortgage-backed securities.
While the fund invests globally, and within any industry, no more than 40% of its net exposure will be in emerging market debt securities. Of course, such a fund is never likely to deliver bumper returns. However, that’s not its goal. It’s a portfolio that’s best suited to investors wanting a return, while preserving their capital.
4) Threadneedle Global Extended Alpha
This fund has been managed by Neil Robson since 2012. It also has a few investment tricks up its sleeve. As well as having straightforward long equity exposure, meaning it will profit from an increase in a company’s share price, it can also take short positions. This means it can invest in such a way as to make money if the value of an asset falls. As a result, it’s in a great position to benefit, irrespective of stock market conditions.
The manager also employs an “equity extension strategy” that allows proceeds from short positions to be used to extend long positions in the portfolio. This enables him to include more of his strongest investment ideas.
The fund doesn’t usually short more than 30% of its value, while long positions don’t normally exceed 130%. When implemented correctly, this 130/30 fund structure can help to magnify good performance and give investors more bang for their buck.
5) Lazard Global Equity Franchise
The attraction of this fund is that it tends to go down less in falling markets, despite the fact it still offers investors exposure to equities. The portfolio is run by a four-strong team – based in locations around the world – that seeks long-term, defensive returns from a range of companies.
A focus on quality businesses with such an edge, which can include a particular brand or the ownership of intellectual property, means it ticks the defensive box. And knowing their money is invested in successful, well-established companies with decent visibility over their future earnings may be reassuring for investors.
The fund’s managers believe that so-called economic franchises have a track record of delivering consistent returns and lower volatility than the market. “Our research also shows that economic franchises have historically defended well in periods when the market was down,” they have stated.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre