Growing geo-political tensions in Eastern Europe and the Middle East have already caused pull-backs in the market this year.
However, the potentially dangerous combination of high valuations and a lack of implied volatility has caused a large number of managers to hide for cover in cash.
On top of that, there is also the peculiar scenario where good economic data is being translated as bad news for financial markets as central banks, like the Fed and the Bank of England, may be forced to tighten monetary policy faster than first anticipated; which would likely put pressure on both bonds and equities.
Given those risks, a growing number of experts are placing an increased emphasis on capital preservation. Therefore in the next article in this series, Square Mile, the investment research firm and FE’s strategic partner, highlights its favourite funds for investors who want their hard earned savings to be protected.
Jupiter Strategic Reserve
First on the list is Miles Geldard’s £70m Jupiter Strategic Reserve fund. Although the multi-asset fund, which sits in the IMA Targeted Absolute Return sector, was only launched in April 2012, the team at Square Mile rate Geldard’s strategy and the fact he has had to deal with all types of market conditions during his career.
“Geldard's investment approach is focused on minimising losses and he would much rather be too cautious than have too much risk in the portfolio,” Square Mile said.
“He is an experienced investor who has witnessed first-hand the damage that has been imparted by swooning markets in Asia and in the West. He takes his fiduciary responsibilities very seriously and he is extremely mindful of his obligations to his investors to avoid losses.”
“The manager has an impressive record of maintaining investors' capital over a number of market crises in the last 15 years. This is testament to his cautious approach and the well-crafted portfolio construction.”
Jupiter Strategic Reserve attempts to deliver a positive return over any given three-year period. According to FE Analytics, the fund has returned 6.62 per cent since its launch with an annualised volatility of just 1.57 per cent.
However, as the graph below shows, it has struggled at times in 2014 and is down 0.6 per cent year to date.
Performance of fund vs index since Apr 2012
Source: FE Analytics
Geldard invests across bonds, equities, convertibles and alternative investment strategies in this fund and will take both long and short positions to try and defend capital. He also has various currency exposures and, again, will go both long and short.
Jupiter Strategic Reserve has an ongoing charges figure (OCF) of 0.86 per cent.
Newton Real Return
Square Mile also rates Newton Real Return. The £9bn fund has been run by FE Alpha Manager Iain Stewart since March 2004.
Stewart has warned investors about the growing risks facing the market on numerous occasions and Square Mile says he is one manager who can effectively protect money if conditions to worsen substantially.
“In the manager's view, the main risk to any investment is the permanent loss of capital and short-term volatility is of secondary consideration if the underlying investments remain sound.”
“The manager focuses his attention on determining what would represent fair long-term valuations for various asset classes and securities.”
“The process starts with the fund's performance aim, which is to generate returns of cash plus 2.5 per cent net of fees, and maintain a level of volatility somewhere between that of bonds and equities.”
Our data shows Newton Real Return has returned 88.47 per cent over 10 years. As a point of comparison the FTSE All Share has returned 94.42 per cent over that time, but has been twice as volatile.
Performance of fund vs indices over 10yrs
Source: FE Analytics
The fund has made a positive return in nine out of the last 10 calendar years, the exception being 2011 when the fund fell 0.78 per cent.
It did make 3 per cent in the crash year of 2008, however.
Stewart holds roughly 60 per cent of his portfolio in equities, although they are mainly high quality, cash generative mega-caps that aren’t economically sensitive. The rest of the fund is spread across bonds, cash and gold. Stewart also uses derivatives to hedge risk.
The OCF is 0.79 per cent.
TwentyFour Monument Bond
Square Mile’s final recommendation is the five crown-rated TwentyFour Monument Bond fund.
It likes the fund because it should offer cautious and income-seeking investors protection against the threat of rising interest rates due to its strategy of investing in residential mortgage backed securities [RMBS].
Though the group warns that RMBS carry various risks, Square Mile says the £144m fund would be a useful holding for any investor trying to build a diversified portfolio.
“The fund is likely to perform well in an environment of economic growth, where investor confidence is improving, liquidity conditions ameliorating and interest rates rising.”
“We would expect it to underperform in times when liquidity is being removed from the market and investor sentiment deteriorating.”
“We believe this could be a very interesting proposition for investors who wish to access an income stream which should grow as interest rates rise, potentially offering investors some protection from the effects of inflation; although this is unlikely to be linear.”
TwentyFour Monument Bond, which is managed by Rob Ford and Ben Hayward, was launched in August 2009 and has returned 24.27 per cent over that time.
Performance of fund vs index since Aug 2009
Source: FE Analytics
Though the fund, which is a member of the IMA Specialist sector, had a tough year in 2011 with losses of more than 6 per cent, it has made a positive return in every year since its launch in and is up 3 per cent in this year’s volatile market.
The TwentyFour fund invests purely in European and Australian securities RMBS. However, to try and limit risk, the managers will only hold assets that have a credit rating of at least BBB-.
The fund currently yields 1.9 per cent and has an OCF of 1.08 per cent.
