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Written by: Darius McDermott
18/10/2021
It’s now 18 months since we witnessed the fastest market sell-off in history. Since then, we’ve seen global equities recover some 50 per cent.

I wouldn’t call global stock markets robust by any means – but the recovery has been impressive. I recently read that the US economy is moving so quickly that forecasters are estimating it would expand by roughly 7 per cent this year, with the S&P 500 also hitting record highs.

But with all investment markets – from bonds to equities and real estate to classic cars – now expensive, and central banks starting to withdraw the stimulus they provided to keep economies afloat, uncertainty has set in.

UK economic growth is falling, there are worries over a Chinese property bubble, and inflation is threatening to become more persistent than first thought. When markets look expensive, it does not take much to unnerve them.

So where do investors run for cover? That’s where this situation is slightly different from the norm.  Traditionally, you could invest in a defensive asset like government bonds – unfortunately they have very little yield or even negative yields, so are risky themselves right now.

With this in mind, here a few options for investors to consider as a way to invest in these more challenging markets.

Targeted Absolute Return

One option could be the targeted absolute return sector, where you can find a mix of different types of funds. The problem is, many are quite expensive in terms of charges and some just haven’t lived up to their promises.

There are a few which buck the trend, however – two examples of which are the Artemis Target Return Bond fund and TwentyFour Absolute Return Credit.

Managed by Stephen Snowden, Artemis Target Return Bond has the flexibility to short bonds as well as go long, allowing the team to potentially make money when bond prices fall as well as rise. TwentyFour Absolute Return Credit is ‘long only’ but invests in short duration bonds. This means the bonds are less sensitive to big moves in interest rates or the economy, as the bonds mature soon.

Multi-asset

Another option which gives you some defensive cover but also the potential for some returns would be mixed asset funds. These funds can combine a range of different assets and the broad mix of different investments can help to reduce risk. They will have exposure to traditional asset classes like bonds and equities, but also areas such as renewable energy, music royalties, care homes, logistics, warehouses and many more.

Examples here include the likes of the TB Wise Multi-Asset Growth fund, which currently has almost 30 per cent in alternative investments.

Another would be the Rathbone Strategic Growth Portfolio, managed by David Coombs. This fund targets cash plus 3-5 per cent per annum over a minimum five-year period and has a big focus on delivering this via a risk-controlled framework – he does this by dividing assets into three specific categories equity risk, liquidity (assets like government bonds which can be bought and sold easily) and diversifiers.

Defensive Income

Re-investing dividend returns has historically shown to be the best way to grow your investments in the long-term, so an income element makes sense in any environment.

When it comes to income, we’re particularly keen on funds with a “go anywhere” mandate – which lends itself to those with a global remit.

For this, I’d look to those with a proven, long-term investment philosophy, so I’d start with the Murray International Trust, managed by Bruce Stout, which offers an international portfolio of both equities and bonds and is backed by one of the largest research teams around. The 75-stock portfolio currently yields an attractive 4.8 per cent.

Others to consider include the TM RWC Global Equity Income fund, managed by Nick Clay.

Pure stockpickers

There is also the option of considering the pure stockpickers who, to a certain degree, pay little attention to the economy and instead concentrate on the outlook for individual companies. These tend to be high conviction managers and for this I’d look to those with a bias towards smaller and medium-sized firms.

A good example would be the Baillie Gifford Global Discovery fund, which invests in smaller companies with very high growth prospects from all over the world.

Manager Douglas Brodie focuses on businesses which are highly innovative and capable of changing the world in some way; this means the fund tends to have significant weightings in the technology and healthcare sectors.

Because a lot of the holdings are early-stage companies, Douglas has a keen focus on diversification, so the portfolio has between 75 to 150 stocks in no less than six different regions at any one time. Performance has been exceptional, returning 173 per cent to investors in the past five years.

Others to consider include Marlborough Special Situations or the Aberdeen Standard SICAV I – Global Mid-Cap Equity.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre

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