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Tilney Bestinvest: Five funds for volatile markets

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Written by: Jason Hollands
29/09/2015
Jason Hollands of Tilney Bestinvest looks at five investment vehicles that could help investors navigate stormy markets.

Equity markets have been going through a turbulent time of late. Investors in funds correlated to general market movements may well be looking for investments built for tougher times.

It is impossible to predict how long this current spell of heightened volatility will continue. Markets may remain skittish, and this environment requires investors to keep their nerve and ensure their ISA and pension portfolios are well diversified. Defensive investments can help bring greater stability to an overall portfolio.

Here are five investment vehicles that could help investors navigate stormy markets:

Invesco Perpetual Global Targeted Returns

This fund aims to achieve a positive return in all market conditions over a three-year rolling period, targeting a gross return of 5 per cent above UK interest rates.

It seeks to do this by investing in a plethora of distinct investment ideas – currently 26 – each of which aims to add a little return, often. These cover trades in equity markets, credit markets, relative movements between currencies, the direction of interest rates and volatility.

The fund is an upstart competitor to the successful Standard Life Investment Global Absolute Return Strategies fund, which we rate highly – at £2.9bn in size it is a relative David compared to Standard Life’s £26.3bn Goliath.

Threadneedle UK Absolute Alpha

This fund offers investors participation in the UK stock market, but with far less volatility than a traditional fund. It invests in UK large and mid-sized companies, but also takes short positions in companies managers Mark Westwood and Chris Kinder believe are set to disappoint.

This strategy enables the managers to generate returns both from companies they think are undervalued and will benefit from reappraisal by the market, and those they believe are expensive and vulnerable to derating. Typically, the fund has around two-thirds in long positions and a third in shorts.

Earlier this year, the fund profited from shorting two of the large supermarket chains which suffered from increased discounter competition. While the FTSE All Share has declined 6 per cent in the 12-months to end of August, this fund made a positive return of 6 per cent.

FP Argonaut Absolute Alpha

This is a long/short equity fund invested principally across European and UK equity markets. It has been more volatile than the Threadneedle UK Absolute Alpha fund, but with attractive returns and lower volatility than the FTSE Europe Index.

The fund is managed by Argonaut Capital Partners, a European equities focused boutique founded by ex-Neptune manager Barry Norris in 2005. Currently the fund has 35 long positions and 21 shorts, with its main negative positions being in the financial and energy sectors.

JO Hambro UK Opportunities

Some equity managers have inherently defensive styles, one being JO Capital Management’s Hambro’s John Wood, who has been particularly successful in tougher times. We estimate across his 13-year track record of managing funds in the UK All Companies sector he has beaten the market in 77 per cent of down months.

Wood’s fund is currently invested in 27 quality growth companies generating predictable and growing cash flows, with strong balance sheets.

Stocks are selected on their individual attributes, not based on how large a constituent they are in the FSTE All Share Index.

Wood has both a strict sell-discipline and a strong focus on capital preservation. For some time, he has warned of a coming financial tsunami, believing markets have been artificially inflated by extreme monetary policies and quantitative easing. He has held back significant cash in the fund (17.6 per cent at the end of August) to protect capital and be in a position to invest when better value emerges.

Although the fund is now soft closed to prevent it becoming too large, it remains available on certain platforms.

Personal Assets Trust

Advised by Troy Asset Management, this trust places a very strong emphasis on capital perseveration.

Personal Assets invests across equities, index-linked bonds, gold and cash. The valuation of assets is especially important for Personal Assets Trust and if the management believe markets are overpriced, the trust will hold cash instead rather than overpay.

This highly defensive approach has been deeply out of favour for the last few years as markets surged higher, but this approach should prove robust. The defensive nature of the portfolio is evident with a 27.5 per cent exposure to cash and near-cash investments such as short-dated government bonds.

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