Markets haven’t exactly inspired hope in investors this year, following a series of headwinds including the China slowdown sparking lacklustre global growth, plummeting commodity prices and impending interest rate rises from the Federal Reserve and the Bank of England.
Ultra-loose monetary policy has also led to the correlation of bonds and equities, meaning safe havens within markets are limited.
Of course, before we get too gloomy, there are plenty of caveats the recent bearish comments about the state of the market and all its perceived distortions thanks to years of quantitative easing and ultra-low interest rates.
Nevertheless, for those who want a degree of protection within their portfolios in preparation for any future crashes and sell-offs, where should investors be turning to?
FE Trustnet asks five fund managers, analyst and DFMs for their top defensive fund picks that they hope will be there to protect their clients through any potential market crash.
FE Alpha Manager Iain Stewart’s (pictured) Newton Real Return fund is one of most popular vehicles in the IA Targeted Return sector and the manager is one of the most vocal critics of the central bank intervention seen over recent years. 
Stephen Peters, investment analyst at Charles Stanley, holds the £9.3bn fund across a number of their lower risk portfolios as the manager’s approach is unconstrained and flexible, which he believes to be important in delivering attractive real return during times of volatility.
“The manager's 20-year experience in managing multi-asset portfolios has been crucial in navigating through the capital market volatility witnessed in recent years,” he explained.
“The fund's greatest attraction is in its return profile. During periods of extreme market volatility, the fund has protected capital well on the whole. The largest drawdown on a calendar year basis in the last 10 years has been a handful of basis points. It could form the core part of any portfolio to be held throughout the cycle.”
Newton Real Return has outperformed its sector average in the IA Targeted Absolute Return sector during the bear markets of 2008, 2011 and 2013, and has almost doubled its peer group composite over 10 years.
This means that the fund has delivered equity like returns but with much lower volatility.
Performance of fund vs sector and benchmark over tenure
Source: FE Analytics
Its largest long exposure is currently in cash at 22.6 per cent, while its next biggest weightings are in government bonds at 20.35 per cent, healthcare at 8.46 per cent and telecom, media & technology at 8.21 per cent.
Newton Real Return has a clean OCF of 1.11 per cent and yields 2.24 per cent.
Old Mutual Global Equity Absolute Return
Ryan Hughes, fund manager at Apollo Multi Asset Management, says that he wouldn’t necessarily own something that has significant downside protection during a major crash as he would move primarily into cash and gold should he foresee that scenario.
However, he currently owns Old Mutual Global Equity Absolute Return as a defensive play, and has a 2.5 per cent weighting to the fund in the Apollo Balanced fund and a 4.25 per cent weighting in the Apollo Cautious fund.
“This fund is run on a market neutral basis therefore taking away any directional bias towards equities which gives it strong downside protection in falling equity markets,” he said.
“By using a quantitative approach, the process also avoids falling into behavioural traps which so often occur in times of market stress and allows the fund to comfortably go into areas that are out of favour with fundamental analysts.”
The £3bn fund, which has been managed by Amadeo Alentorn, Ian Heslop and Mike Servent for around six years, aims to deliver positive returns over a rolling 12-month basis and has returned 6.21 per cent over the last year, outperforming its sector average by 3.31 percentage points.
Performance of fund vs sector over 1yr
Source: FE Analytics
“It offers excellent diversification from both equities and fixed interest and this has been seen over the past five years when at times of market stress, performance has been very good,” Hughes explained.
The fund currently has significant long positions in healthcare and telecom, media & technology, while it has short positions in industrials, utilities, basic materials, financials and consumer products.
It has a clean ongoing charges figure of 0.85 per cent.
For those looking for a one-stop-shop which can protect them on the downside, Sheridan Admans – investment research manager at The Share Centre – says that Marcus Brooke and Robin McDonald’s £187m Schroder MM Diversity Income fund is a good option.
It aims to provide a total return that beats inflation while making an average 4 per cent income payment over a five-year rolling period.
“We particularly like the managers’ contrarian approach to investing and hence looking towards more unloved areas of the market. This however can mean that the fund could suffer from periods of short-term underperformance,” he explained.
“While the fund has not had a great performance in 2015 it has grown its dividend and the managers’ ability over the years to protect the fund’s downside performance has helped it outperform its peers since inception.”
Since its launch almost five years ago, the three crown-rated fund has returned 27.5 per cent, outperforming its peer average in the IA Mixed Investment 20%-60% Shares sector by 4.12 percentage points. It has also in the top quartile for its annualised volatility, risk-adjusted return and maximum drawdown.
Performance of fund versus sector since launch
Source: FE Analytics
Schroder MM Diversity Income has struggled over recent years though due to the managers’ negative view on the bond market and US equities, as well as their high weighting to cash.
Nevertheless, the fund has really comes into its own during market falls though, having landed a place in the top quartile for its performance during the European debt crisis of 2011 and the Taper Tantrum of 2013.
Schroder MM Diversity Income has a clean ongoing charges figure (OCF) of 1.29 per cent and currently yields 3 per cent.
Lindsell Train Japanese Equity
Equities tend to fall much further than bonds during market crashes, but for long-term investors who want a higher risk option than absolute return funds that can still defend their savings during times of turbulence, Premier’s Simon Evan-Cook says Lindsell Train Japanese Equity is one of the best out there.
Managed by Michael Lindsell, it is a concentrated portfolio of 20 to 35 equities and aims to increase the value of capital over the long term.
“Lindsell spends most of his time trying to identify businesses that will still be around in 50 years, and so are at limited threat from devastation by competition, war, technological obsolescence, regulation and anything else you care to throw at them.”
“Yes, the prices of these companies will drop during a bear market, but you can at least be confident that they will survive through tougher times, and probably even come out stronger the other side as weaker competition will have been wiped out,” Evan-Cook said.
“3.5 per cent of our Multi-Asset Global Growth fund is in this fund, but we have managers across other geographies who operate using a similar philosophy.”
The £62m fund was launched in March 2011 and, every year from 2012 onwards, it has been in the top decile for its total return. Since its launch, it has more than doubled both its TSE TOPIX benchmark and its peer average in the IA Japan sector to deliver a return of 110.89 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It is also in the top decile for its alpha generation and risk-adjusted return since launch.
The fund also holds 3 per cent in cash. Lindell Train Japanese Equity has a clean OCF of 1.23 per cent.
CF Miton UK Value Opportunities
For UK equity investors, Ben Williams, investment manager at Saunderson House, says CF Miton UK Value Opportunities is his favourite offering.
Williams says that while it’s not his belief that things are going to go downhill significantly from here and he is currently investing in recovery-style funds, he would choose Miton UK Value Opportunities as one of the funds he expects to do well during a ‘risk-off’ period.
Launched in March 2013, Miton UK Value Opportunities is managed by Georgina Hamilton and FE Alpha Manager George Godber, and aims to achieve long-term growth through stocks that the managers believe to be undervalued by markets.
“It’s done very well since launch but it also protects well on the downside and in more volatile periods due to George and Georgina’s disciplined, long-term, deep value approach to investing, focusing on unloved, out of favour stocks trading at big discounts to their forecast of intrinsic value,” he said.
Since March 2013, the £497m fund has returned 55.82 per cent, outperforming its sector average and benchmark by 38.13 and 47.62 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It is also in the top decile for its annualised volatility and for its risk-adjusted performance as measured by its Sharpe ratio, not to mention also being top-decile for its alpha generation and its maximum drawdown, which measures the most money an investor would have lost if they’d bought and sold at the worst times.
“They pay meticulous notice to downside risk, in particular the funding position of a company, since often typical companies identified by their screening are having internal issues or are going through some form of change,” Williams continued.
“Buying undervalued stocks with a margin of safety is therefore key to their investment process. Despite the managers taking high conviction, index-agnostic positions, this focus on potential downside risk has meant that the fund is the least volatile fund in the IA UK All Companies and has the lowest peak to trough drawdown since its launch.”
Miton UK Value Opportunities, which is a multi-cap fund, has a clean OCF of 0.89 per cent.
