August’s ‘Black Monday’ served as a reminder for many investors that markets can plummet at any time and Tilney Bestinvest’s Jason Hollands says portfolios must therefore be able to perform throughout varying stages of the market cycle. 
As such, the managing director has given a list of his top five fund picks that could shield investors from any nasty surprises that might be lurking around the corner.
Invesco Perpetual Global Targeted Returns
Managed by Dave Jubb, David Millar and Richard Batty since launch in September 2013, this £3.9bn fund aims to consistently achieve positive returns regardless of market conditions over a rolling three-year period.
It also targets a total return that is 5 per cent higher than UK interest rates while maintaining half the volatility of global stock markets.
Since launch, the fund has almost doubled the performance of its average peer in the IA Targeted Absolute Return sector and is 5.76 percentage points above its 3-month LIBOR benchmark.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“The fund is very clearly an upstart competitor to the now massive and successful Standard Life Investment Global Absolute Return Strategies [GARS] fund, which we also rate highly,” Hollands said.
“At £3.9bn in size GTR is a relative David compared to Standard Life’s £26.3bn Goliath and is very scalable. While a number of challengers have emerged to replicate the success of GARS, Invesco Perpetual’s is particularly well placed being managed by some of the former Standard Life team.”
Invesco Perpetual Global Targeted Returns has a clean ongoing charges figure (OCF) of 0.87 per cent.
Threadneedle UK Absolute Alpha
Holding the top five FE Crowns, Threadneedle UK Absolute Alpha has an FE Risk Score of just 25, which means the fund is deemed to have shown one-quarter of the risk of the FTSE 100 index over recent years.
Managed by Chris Kinder and Mark Westwood since its launch in 2010, the £443m fund invests in large and mid-cap companies while taking short positions in areas of the market they believe are set to fall.
“This long/short strategy enables the managers to generate returns from both companies they think are undervalued and will benefit from an eventual re-appraisal by the market and those they believe are expensive and are vulnerable to a de-rating,” Hollands explained.
“Typically the fund has around two-thirds in long positions and a third in shorts. For example, earlier in the year the fund profited from shorting two of the large supermarket chains which suffered from increased competition from discounters Aldi and Lidl [positions now closed]. While the FTSE All Share has declined by 6 per cent in the 12 months to end of August, this fund made a positive return of 6 per cent.”
Since its launch, the fund has returned 34.55 per cent, outperforming its sector average by more than double.
Performance of fund vs sector since launch
Source: FE Analytics
Threadneedle UK Absolute Alpha has a clean OCF of 1.07 per cent.
Another fund with a long/short investment style, FP Argonaut Absolute Return aims to achieve positive absolute returns through positions in various asset classes, irrespective of market conditions.
Not only is its portfolio constructed to be defensive, it has outperformed its MSCI Europe ex UK benchmark and its sector average over one, three and five years as well as over one, three and six months.
Since FE Alpha Manager Barry Norris’ launched the now £368m fund in 2009, it has provided a total return of 107.49 per cent, outperforming its sector average and benchmark by 24.27 and 79.05 percentage points respectively.
Performance of fund vs sector and benchmark over management tenure
Source: FE Analytics
“It has been more volatile than the Threadneedle UK Absolute Alpha fund, but with attractive returns and lower volatility than the FTSE Europe index,” Hollands said.
“The fund is managed by Argonaut Capital Partners, a European equities focused boutique founded in 2005. Currently the fund has 35 long positions and 21 shorts, with its main negative positions being in the financial and energy sectors.”
In terms of sector, the fund’s largest long positions are in consumer products, telecom, media & technology and healthcare.
FP Argonaut Absolute Return has a clean OCF of 0.95 per cent.
Managed since its 2008 launch by FE Alpha Manager John Wood, JO Hambro UK Opportunities consists of 27 holdings, which have been picked for their ability to generate predictable and growing cash flows while maintaining strong balance sheets.
The manager also chooses stocks based on their individual attributes as opposed to their weighting in the FTSE All Share index and, as a result, the £1.5bn fund boasts a top-decile alpha ratio since launch.
It has also achieved a strong performance over the same time frame, having posted a total return of 121.8 per cent and outperforming its peer average in the IA UK All Companies sector by 43.63 percentage points.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“Of course defensive approaches aren’t the exclusive reserve of funds that use sophisticated hedge-fund like investment techniques or esoteric trading strategies that investors may struggle to get their heads around. Some equity managers have investment styles that are inherently defensive, one being JO Hambro’s John Wood who has been particularly successful in tougher times,” Hollands said.
“For some time Wood has warned of a coming ‘financial tsunami’ as markets have been artificially inflated by extreme monetary policies and quantitative easing. He has been holding 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.”
The fund, which is now soft closed to prevent it from becoming too large, it is still available on certain platforms.
According to Tilney Bestinvest’s research, Wood has beaten the market in approximately 77 per cent of down months during the market across his 13-year track record, which is why Hollands believes the fund is a welcome addition to an ‘all-weather’ portfolio.
JO Hambro UK Opportunities has a clean OCF of 0.81 per cent and yields 2.81 per cent. Like all JO Hambro funds, it charges a performance fee.
Personal Assets Trust is the only closed-ended vehicle in Hollands’ list and it aims to both protect and increase the value of shareholders’ capital over the longer term. It also aims to avoid any level of risk that is significantly greater than the FTSE All Share index and has an FE Risk Score of 42.
The £589m trust is managed by Sebastian Lyon and it currently has a 27.4 per cent cash holding as well as a 40.6 per cent weighting in international equities, a 17.3 per cent in North American equities, 10 per cent in commodity & energy and 4.7 per cent in UK gilts.
While Hollands says that Lyon’s highly defensive approach has been out of favour over recent years, it should provide significant protection and robust returns during market turmoil.
“Personal Assets Trust is advised by Troy Asset Management and pursues a strategy which places a very strong emphasis on capital perseveration rather than measuring its success based on relative performance against markets,” Hollands explained.
“Although it sits alongside peers that focus on global equities, 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.”
Because of Lyon’s focus on capital preservation over high and aggressive returns, the trust has returned about half the gains of its sector average and benchmark over Lyon’s time on the portfolio.
However, Hollands says its defensive approach would be valuable as part of a diversified portfolio in order to smooth returns.
Performance of trust vs sector and benchmark over management tenure
Source: FE Analytics
“With some of these authorities now looking to ‘normalise’ policy at a time when concerns are been mounting over China, markets may well remain skittish, reacting to each new piece of data, leading to big swings,” he continued.
“This environment requires long-term investors to keep their nerve and ensure their ISA and pension portfolios are well diversified. More defensive investments can help bring greater stability to an overall portfolio.”
Personal Assets Trust is trading on a 0.3 per cent premium, yields 1.7 per cent and has an ongoing charges figure of 0.93 per cent.
