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Five funds for the defensive investor

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A selection of products for investors who want to lower the volatility of their portfolios.

As we have witnessed in recent days, markets are highly sensitive to any change in economic policy or even change of tone.

This may well have left some investors wanting a portfolio that takes on a more defensive stance at the core. 

Rob Morgan, pension and investment analyst at Charles Stanley Direct, says: “Outside cash there are no low risk options at the moment. Bonds, traditionally an area targeted by more cautious investors, look expensive compared to the income they generate.

“This is likely an effect of Central Banks pumping money into the system via quantitative easing (QE). Newly printed money is being used to buy up government bonds, artificially increasing prices and lowering yields. As other bonds are priced with reference to the “risk free” rate on government debt, they too have suffered falling yields.”

Morgan says that investors looking for returns ahead of inflation have been forced to consider riskier assets, one reason why stock markets have been forging ahead. He points out that stocks aren’t providing investors good value, not like they did a couple of years ago, and that it is important that investors understand that stocks are subject to greater volatility as QE tapers off.

So for investors wishing to diversify or lower the volatility of their portfolios, or who simply want to build a defensive core for the long term, here are five funds he believes are worth considering.

Standard Life Global Absolute Return Strategies

Many “absolute return” funds have had a bad press. Quite simply, they have not delivered what they set out to achieve – positive returns in most market conditions coupled with low volatility. Standard Life Global Absolute Return Strategies is an exception.

The fund uses a range of strategies to generate returns encompassing equities, bonds, currencies, interest rates, real estate and more. For instance, one trade that has benefited the fund recently is backing the US dollar to appreciate against the Japanese yen.

Blending 20 or more strategies means no single position dominates performance, so provided the managers get the majority of their strategies right, the fund is likely to generate positive returns – though there are no guarantees.

Old Mutual Global Strategic Bond

This is a highly unusual bond fund. Its aim, rather than to produce a steady income is primarily to beat both returns on cash and inflation whilst sheltering capital.

Seeking to achieve this, the manager, Stewart Cowley, has a wide variety of strategies at his disposal, including the full spectrum of the bond market, currencies and derivatives.

Presently the fund is positioned for sustained inflation. Index-linked UK and US government bonds represent around half of the portfolio.

There is also some exposure to corporate bonds. He is poised to short UK gilts and US treasuries when he believes the moment is right – something conventional bond funds are unable to do.

However, Cowley will have to judge carefully when to shift his portfolio. You can read more about his current views here.


Personal Assets Trust

Sebastian Lyon is perhaps better known for managing the Troy Trojan fund, but his focus on capital preservation extends to this investment trust. Lyon believes we are in an era of “reluctant speculation”.

As investors scramble for income and returns that outstrip inflation, prices, and risks, are driven higher.

As always the portfolio is invested conservatively in its “four pillars” – blue chip equities, index-linked bonds, gold and cash – with the aim of producing steady returns and dampening volatility.

Invesco Perpetual UK Strategic Income

Equities are not as cheap as they were but many companies are highly profitable and able to provide high and growing dividends. Equity income funds target these firms, providing investors with a rising income which, if not required, can be reinvested to produce compound growth. In our view equity income should form the core for most investors’ portfolios, whether they are looking for income or growth.

Invesco Perpetual Strategic Income fund managed by Mark Barnett is worth considering for exposure to the sector. He is currently positioned cautiously believing only a select number of companies have the ability to grow revenues, profits and dividends in a low growth world. 

CF Miton Strategic Portfolio

Martin Gray, manager of the CF Miton Strategic portfolio, believes the world’s economic ills have been pushed to one side, and at some point anaemic growth and stagnant corporate earnings will come back into focus. Gray warns this is not a time for being brave.

He only has around 30% presently invested in equities, even though the Flexible Investment sector, in which the fund sits, allows up to 100% equity investment.

It means the fund’s performance has been relatively pedestrian in the last couple of years, but Gray has tactically increased exposure to riskier assets successfully in the past, so whilst currently defensive it should also be seen as an opportunistic fund that may take on more risk in the future.

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