The UK market has been essentially flat since its peak in April of last year, with stocks failing to keep up with the optimism surrounding the UK economy.
Scouller says that the recent choppy markets suggest investors should be de-risking their portfolios and locking in gains.
“Following a prolonged rally in stock markets, it feels as though this has started to run out of steam, with markets struggling to make headway recently,” he said.
“We think there is a good case for looking at some funds which have the potential to perform relatively well in any forthcoming equity market correction.”
“The other option of course is to take some profits and sit on some cash until there is more ‘value’ in the sector.”
Cayenne Trust
Scouller highlights this often overlooked £49m trust as worthy of consideration for investors looking to de-risk.
“The aim is to achieve consistent positive absolute returns by investing primarily in investment trusts and closed-ended funds,” he said.
“Derivatives and similar instruments are used for capital preservation.”
Data from FE Analytics shows it has the least volatile share price in the Global sector over three years, with an annualised figure of just 5.39 per cent.
The trust has a significant position in private equity, which currently makes up 26.4 per cent of the fund. Equities account for 46.5 per cent and fixed interest 15.1 per cent while the trust has 11.1 per cent in cash.
It is effectively 20 per cent short the index.
Returns were poor in 2011, but the last year has been particularly good for the trust. It lost just 2 per cent as markets came off and ended 2013 up 18.06 per cent.
It has made 4.8 per cent in share price terms so far this year compared with an average of 1 per cent for the sector.
Performance of trust vs index over 3yrs
Source: FE Analytics
The trust has ongoing charges of 1.7 per cent and is available through Trustnet Direct. It has a performance fee.
Capital Gearing
The £99m Capital Gearing trust has been managed by Peter Spiller since 1984.
It is another fund of funds structure and has an excellent track record of protecting capital over the long-term.
The trust lost money for the first time in more than a decade last year, as investors turned to risk assets.
It fell back from a 17 per cent premium to just 4.7 per cent, which was responsible for the 9 per cent loss investors suffered. Since then the premium has increased back to 10.4 per cent.
“The investment objective is to achieve absolute returns through active asset allocation across equities, bonds and commodities,” Scouller said.
“Equity investments are made in quoted closed-ended trusts and other collective investment vehicles.”
At the moment, 30 per cent of the portfolio is invested in index-linked government bonds, while 8 per cent is in normal bonds.
Investment trusts make up 27 per cent of the portfolio, with preference shares and convertible debt totalling 23 per cent. The manager has 10 per cent in cash and 1 per cent in gold.
It has ongoing charges of 1.28 per cent.
Personal Assets Trust
Scouller also tips Personal Assets Trust, whose manager, Sebastian Lyon, has remained defensively positioned and highly sceptical of recent gains in equity markets.
A large position in gold has hurt the manager recently, and he also has a high weighting to index linkers.
This defensive position meant that the fund underperformed last year, although it is another that has done extremely well in past market corrections, such as that of 2011.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
Index linkers make up 22 per cent of the fund, while Lyon prefers blue chip equities such as the maker of Dr Pepper.
Gold bullion makes up as much as 11 per cent of the portfolio and cash 24 per cent. Ongoing charges are 1.15 per cent.
Ruffer Investment Company
The £325m Ruffer Investment Company is another one of the defensively focused funds to have come out of last year well.
The portfolio made 7.25 per cent in 2013, helped by exposure to Japanese equities.
This is despite the fund maintaining significant positions in gold and index linkers, both of which did poorly.
Performance of fund vs sector since Jan 2013
Source: FE Analytics
The fund currently has around 50 per cent in equities, including 14 per cent in Japan and 14 per cent in the UK.
The managers explained in their most recent note to investors why they are maintaining a high equity exposure despite their scepticism on earnings growth.
“In the company’s portfolio, we have already moved out of the ‘expensive defensives’, which performed very well for us, and into relatively cheaper but more cyclical equities,” they said.
“We remain cognisant of the fact that monetary policy remains supportive in the short-term, hence our overall equity weighting has not been reduced.”
“This in no way means that we are immune from stock-specific disappointments, but cheaper valuations may provide some insulation; earnings can still fall but multiples are less likely to contract to the same extent as the highly rated defensives. Stocks like IBM, Volkswagen and Cape look interesting in this context.”
The portfolio has 32 per cent in index-linked government bonds, 6 per cent in gold and listed gold mining companies, and 5 per cent in cash.
“Historically, the portfolio has performed relatively well at times of equity market weakness,” Scouller said.
RIT Capital Partners
The analyst also tips this £1.9bn multi-asset portfolio, chaired by Lord Rothschild.
“Following a tough 2012, RIT had a better 2013, with the NAV TR rising by 19 per cent,” Scouller said.
“The portfolio tends to do relatively well in weaker market conditions and the managers say that since inception, RIT has participated in 70 per cent of market upside but only 38 per cent of market declines.”
The portfolio has 49 per cent in long equities, 14 per cent hedged equities, 13 per cent unquoted funds, 12 per cent private equity direct investment and 7 per cent in absolute return and credit, with the remaining 4 per cent held in real assets.
RIT offers access to a number of hedge fund and private equity mangers that are unavailable to retail investors.
The manager Ron Tabbouche explained to FE Trustnet in a recent article how the portfolio was being refashioned to improve performance.
Ongoing charges are 0.97 per cent.
