Investors have become bearish since the beginning of March, with a growing appetite evident for the more defensive income-paying sectors.
Marwood says that while he expects equities to outperform in the longer run he thinks it prudent to hold index-linked fixed interest, and has been building up a position in his £918m fund.
“Compared to gilts and cash, equities have been the star asset class for over 100 years, and a key driver of long-term returns, but this is not without its ups and downs in the shorter term,” he said.
“Given market volatility is expected to continue, many cautious investors will want to diversify their exposure and seek allocation to other asset classes.”
“Index-linked gilts can hold up against market volatility and are a wonderful portfolio diversifier, being uncorrelated or negatively correlated with other major asset classes.”
“The added proof against inflation makes them uniquely attractive.”
“A large proportion of exposure to index-linked gilts in the AXA Distribution Fund is in the shorter dated maturities, which are the least volatile and easiest to turn into cash if needed.”
Marwood has long held a significant weighting to index-linked fixed interest which makes up 36 per cent of his portfolio.
This position has paid off this year so far, with index-linked gilts outperforming both conventional fixed interest and equities.
Performance of indices in 2014
Source: FE Analytics
Index-linkers actually outperformed straight fixed interest last year as well, according to FE data, returning 0.54 per cent as non-index-linked lost 3.94 per cent.
These gains have been made despite there being no increase in inflation after the huge bouts of quantitative easing over the past few years.
Index-linkers would offer protection should this eventually come through.
Marwood says that within the equity market he currently favours defensive sectors such as the water utility.
“There has been a big shift in sentiment within equity markets since the beginning of the year. While markets have broadly remained flat, there has been a rotation of performance from the small and mid-caps to mega caps,” he said.
“In addition, corporate activity has drifted up the market cap scale. It is commonplace to see bid activity for smaller companies, but we are increasingly seeing bids being made for larger companies, such as Verizon’s takeover of Vodafone.”
“We expect much more bid activity in the remainder of 2014 and also a high level of new issues through IPOs if the equity market is firm.”
“We prefer companies with robust business models that we believe can withstand tough conditions and market shocks, and seek companies with the potential to pay attractive dividends.”
“Many companies in the water sector have such attributes hence why we have bought into that sector.”
“Water is an everyday need and these companies have good pricing power, strong overall gross cash flows and good dividend predictably.”
“Like any sector however, it has its weakness, and these companies can be affected from time to time by the political agenda.”
The utility sector has been one of the winners of the rotation into defensive stocks this year, according to data from FE Analytics, returning 9.71 per cent.
Performance of indices in 2014
Source: FE Analytics
Marwood holds a number of the large defensive yielders in his fund including Glaxo, BAT, Vodafone and AstraZeneca.
He also holds a large position in the oil and gas sector which has also had a good run – BP, Sell and BG are all top 10 holdings.
The fund is a top-quartile performer over three years, returning 20.3 per cent to the 16.78 per cent of the average fund in the sector.
Performance of fund versus sector over 3yrs
Source: FE Analytics
It is marginally behind over one year thanks to its defensive positioning, but over the past six months as markets have stumbled it has beaten the average of its peer group.
Marwood explains that he sees a number of reasons for investors to remain cautiously-positioned this year.
“Two main issues affecting markets this year are a potential rate rise and political events taking place in the run up to 2015’s UK general election,” he said.
“While it is a certainty that rates will rise – they are too low and need to be normalised – the timing of this is hard to call.”
“Policy decisions as we approach this election will be difficult to predict, as shown in the recent Budget. These all have potential to shock the market, and investors need to ready their portfolios.”
The fund has ongoing charges of 0.77 per cent.