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Five funds to hold in this highly uncertain market

17 July 2016

With political and economic issues dominating the headlines in 2016, FE Trustnet asks industry commentators which funds they can depend on.

By Jonathan Jones,

Reporter, FE Trustnet

Now appears to be a great time to be invested, with equities, bonds and even commodities on the rise.

Brexit was a shock, but markets have recovered well since the vote, with the FTSE All Share climbing 3.86 per cent since 23 June.

However, it would be a stretch to argue euphoria is sweeping through the market. Indeed, since the EU referendum the gold price has rallied substantially, showing how investors are scrambling to find a genuine store of value.

In recent weeks other events have also highlighted this uncertainty, with the issue of property fund “gating” at the forefront.

Meanwhile, more global issues such as the US presidential election and fears over China’s future growth path could both cause greater volatility later down the line.

For those who want a degree of protection, but are concerned that nearly all asset class are rallying in tandem, where should they be looking to help protect their portfolios against another market shock?

With that in mind, FE Trustnet asks a selection of managers, DFMs and analysts for their top defensive fund picks that they hope will protect their clients through any potential market crash.

 

Henderson UK Absolute Return

Darius McDermott, managing director of Chelsea Financial Services, says Henderson UK Absolute Return is “a core fund to own in uncertain times” as returns have been very consistent over the medium term.

The five crown-rated fund, run by the FE Alpha Manager duo of Ben Wallace and Luke Newman, offers a differentiated approach to many of its peers by taking both long and short positions in an attempt to generate alpha.

Its volatility and maximum drawdown since its launch in 2009 are below equities and bonds (represented in this instance by the FTSE All-Share and Barclays Sterling Gilt), and it has had only 24 negative monthly periods over the last three years, a figure significantly higher in the case of equity and bond indices.

The £1.6bn fund underperformed equities in its first year as markets recovered from the financial crisis of 2008, but made a profit in 2011 while the FTSE All Share made a 3.46 per cent loss.

Performance of fund versus indices over 5yrs

 

Source: FE Analytics

Its performance of late has been even strong, as last year it provided a smoother, higher return than the FTSE All Share. It is lagging the UK equity market this year, but has posted much smaller drawdowns.

“This could be a good option for investors who want to retain some exposure to the UK stock market but with much less risk,” McDermott said.

 


Premier Defensive Growth

Another of McDermott’s suggestions is Paul Smith’s Premier Defensive Growth, which has a good track-record of delivering positive through various market conditions.

“The fund is unlikely to shoot the lights out but has consistently delivered a good return in a wide variety of market conditions,” Chelsea Financial Services’ Darius McDermott says.

This year, the fund changed its focus from aiming to produce positive returns over a 12 month period to a rolling three-year period.

The £380m fund’s volatility is especially low, just 1.28 per cent, while its maximum drawdown (the amount an investor could have lost if they bought at the very top and sold at the very bottom) is 1.44 per cent since launch.

“It could be a good option for an uncertain world where cash interest rates are close to zero,” McDermott says.

The five crown-rated fund outperformed equities during the difficult markets of 2011 and 2015, and since its launch has had just 11 negative monthly periods from a possible 43.

 

Newton Real Return

“If you are looking for an all-weather fund, then a decent absolute return fund can provide that kind of capital protection when markets are weak/volatile,” Whitechurch’s Ben Willis says.

“In the current uncertain climate, diversification across asset classes is a prudent strategy so I would suggest a fund such as Newton Real Return.”

The fund, which currently yields 2.2 per cent, performed particularly well during the financial crisis, eking out small gains compared to the heavy losses seen in the market.

Performance of fund versus index in 2008

 

Source: FE Analytics

Newton Real Return, run by Iain Stewart, also outperformed its sector average in the IA Targeted Absolute Return sector in 2011 when the European sovereign debt crisis intensified.

This year it is also performing strongly, with total returns of around 10 per cent compared to the 7 per cent gain from the FTSE All Share.

“The fund has enjoyed an excellent 2016, largely driven by the management teams astute asset calls such as allocating to gold and selective government bonds, and when allocating risk, taking positions in relatively defensive quality equity,” Willis said.

Investment research house Square Mile also has a high opinion of the fund, saying it is an “appealing option for investors seeking a fund that is focused on capital preservation and delivering positive absolute returns over the long term”.

 


JPM Global Macro Opportunities

Andrew Merricks, head of investments at Skerritts Wealth Management, says “there is no such thing as a safe fund”, but adds there are a few that have served him well in recent tough times.

One of which is the JPM Global Macro Opportunities fund, which, while more volatile than some of the others mentioned already, has performed well of late.

“Importantly it has delivered a positive return rather than simply a static one,” Merricks said.

Of all the funds mentioned, it has the shortest track record, having launched in 2013 and therefore remains untested in extreme circumstances.

However the fund, run by James Elliot, Shrenick Shah and Talib Sheikh, performed particularly well against its peer group in 2015 and is outperforming again this year.

Comparing the £519m to the hugely-popular £26.8bn Standard Life Global Absolute Return Strategies fund (GARS), for example, the chart below shows it has outperformed since its launch, with most of its relative gains coming since November 2014.

Performance fund versus GARS since launch

 

Source: FE Analytics

While the JP Morgan fund’s volatility is significantly higher (8 per cent compared to GARS’ 4.9 per cent), the maximum drawdown (priced weekly) is only five basis points higher at 7.87 per cent since launch.

 

Church House Tenax Absolute Return

Another on Merrick’s list of funds that deserve to be seen as core holdings – if you are prepared to accept some rough with the smooth – is the Church House Tenax Absolute Return fund.

“It has done its job very well in the recent days and weeks. Performance is far from exciting when markets are on the rise, but it delivers a consistent positive return year on year in excess of cash and inflation with very low volatility.”

The £56m fund, run by James Mahon and FE Alpha Manager Jeremy Wharton, scores very low for volatility against equities and bonds, but has a higher maximum drawdown than gilts since it’s launched in 2007.

It has had fewer negative monthly periods than equities and bonds since its launch (just 28 compared to 45 and 40, respectively), and on an annual basis, outperformed equities through the bear markets of 2008, 2011 and 2015.

“At a time when many absolute return funds turned out to be absolute rubbish funds, the Tenax has provided that “rest assured” profile that provides a base from which, as an investor, one can move forward again once the storm has passed,” Merricks said.

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