This year has been unsettling for most investors to say the least, following headwinds such as China’s slowdown, the collapse in commodity prices and impending rate hikes from the Fed rocking markets. 
Of course, many market commentators are expecting a more uplifting 2016 for equity markets but uncertainty remains in regard to bonds, with many expecting the multi-decade rally in fixed income to reverse given the low yields on offer and the likelihood of tighter monetary conditions.
Given that there are clear risks on the horizon, though, investors would be forgiven for repositioning their portfolio to provide greater protection against downside risk, and as such, we asked Ingenious Asset Management’s FE Alpha Manager Guy Bowles (pictured) for three fund picks across different sectors that are better suited to cautious investors.
BNY Mellon Absolute Return Equity
The four crown-rated BNY Mellon Absolute Return Equity fund, which is £1.6bn in size, has an FE Risk score of just 16, which suggests that the fund is only 16 per cent as risky as the FTSE 100 index.
Since its launch in 2011 the fund has returned 16.45 per cent. Importantly, however, it has had a maximum drawdown of just 2 per cent over that time.
Performance of fund vs index since launch
Source: FE Analytics
This is in line with the management team’s aim to deliver cash plus 6 per cent over a rolling five-year period.
“It’s a market neutral fund. It doesn’t use perfect pair trading but it tends to pick a stock against an index or a stock against a sector, for instance,” Bowles said.
“We’ve spent a lot of time with them looking at how they define the risk of the pairs, how they measure it and the amount they’re willing to put in any trade. There are four guys and each of them effectively have a little book of business they put together.”
The FE Alpha Manager says he is comfortable that the team adheres to strict criteria as to how they spend their risk budget and how they use their stock losses. While he says that pair-trading funds can be difficult to follow in some cases, he is confident the managers know exactly what they’re doing.
“They allow themselves to have slightly more longs though to give them a little bit more market beta,” Bowles continued.
“The guys there have a huge and deep understanding of the UK stock market, and we were willing to back their judgment in their stock picking both on the upside and the downside. The great thing about adopting this technique is you don’t have to get every call right, as long as you get most of them right you’re going to be fine.”
BNY Mellon Absolute Return Equity has a clean ongoing charges figure (OCF) of 0.96 per cent.
Open-ended property funds can often deter cautious investors due to issues surrounding illiquidity, particularly if they are invested in ‘bricks and mortar’.
However, Bowles believes investors shouldn’t be nervous towards them yet and that the £3.5bn Aberdeen Property Trust is a great option for those who are cautious.
“We were quite heavily invested in open-ended property funds from 2003 to 2007, we then sold out of all of them because our risk models told us the returns we were getting wouldn’t pay for the risk,” he explained.
“A few months later, they then ran into trouble and were shut – we weren’t in them at that point, but we went back into them in 2009. I don’t think we’re back at the levels where I think we should be worried about these kinds of investments.”
The star manager adds that the Aberdeen fund, which was launched in 2004, holds a 17.3 per cent cash weighting as well as 8.3 per cent in equities and 2.5 per cent in fixed interest securities.
“It’s a pretty safe fund and it’s not particularly exciting, but it does a good job and our lower risk clients tend to hold more of that,” he said.
While the fund is in the third quartile over five and 10 years, Aberdeen Property Trust has returned 34.64 per cent over three years, outperforming its peer average in the IA Property sector by 8.32 percentage points.
Performance of fund vs sector over 3yrs
Source: FE Analytics
It is also in the top quartile for its annualised volatility, Sharpe ratio and maximum drawdown over the same time period.
Original manager Gerry Ferguson, who is also head of UK property pooled funds at Aberdeen, was joined by co-managers James McLean and Tim Sankey in June this year.
It has a clean OCF of 0.87 per cent and yields 2.4 per cent.
“I picked [Jupiter European] for its manager Alexander Darwall,” Bowles said.
“When we initially invested we did want to increase our exposure to Europe a bit, partly because we wanted to decrease our exposure at the time to emerging markets. I didn’t want to change the overall equity exposure but I wanted less emerging, and I felt Europe was the best place to put it, along with the UK.”
FE Alpha Manager Darwall has managed the four crown-rated fund since 2001 and over this period it has returned 280.54 per cent, outperforming its sector average and benchmark by 197.95 and 192.95 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, Sharpe ratio and maximum drawdown over the same time frame.
Darwall looks for ‘world-class’ businesses across Europe, particularly those that offer unique products or services that therefore provide strong growth prospects.
The companies must also have a good track record, a proven business model and a management team with “entrepreneurial endeavour” and as such, the manager still believes that he will make stellar returns despite Europe’s recent underperformance.
“The underperformance can be explained by the lack of effectiveness of quantitative easing; a failing energy policy in Europe and a chronic reluctance to undertake supply side reforms. However, in our view it is still possible to find attractive investment opportunities with successful individual companies,” Darwall said.
“Technological advances, changing consumer behaviour, regulatory interventions, liberalisation and entrepreneurial flair are some of the necessary ingredients for creating a good environment for investment. Viewed in this way, we are confident that there are medium term opportunities ahead. Moreover, we continue to believe that our process for understanding the threats and opportunities remains valid.”
Jupiter European has a clean OCF of 1.03 per cent.
