Having marked a series of all-time-highs earlier this year, over the past six months the US and UK stock markets are down some 10 per cent or more. Indeed, most stock markets around the world have suffered a similar fate. 
Is this the start of a bear market, or is it just a temporary correction? If only we knew! A downturn is perhaps due, but for now, the consensus seems to be that we are, at the very least, in the late stages of this cycle – and it’s impossible to say how long it may last.
There is nothing to say that investors need to start panicking, but it could make sense to make sure there is a defensive tilt to portfolios and to think about the parts of the market which have the potential to perform well, even if investor sentiment sours further. And, as always, diversification will be key.
Adding value
During the late stages of the investment cycle, history shows that value stocks tend to perform better than their growth counterparts. This is because there’s likely to be less momentum behind growth stocks if investors grow nervous. They also tend to trade at higher valuations, which means that if you buy in too late you have further to fall in share price terms. As value stocks trade at cheaper valuations, they provide more of a valuation buffer during times of uncertainty.
A fund to consider: Schroder Global Recovery.
While I wouldn’t ditch any growth investments just yet, it may be an idea to use the dips in markets to add to value holdings. This will give a more balanced feel to portfolios that are likely to have developed a growth-bias in recent times. A value fund I rate very highly is Schroder Global Recovery, which aims to build on the success of the Schroder Recovery fund. Managed by Nick Kirrage and Kevin Murphy, with the help Andrew Lyddon, this concentrated, unconstrained value portfolio invests in companies with turnaround potential. It could also be well-positioned to capture a resurgence in value investing.
Going large
While there are many benefits to holding small and mid-cap stocks over the long term, they can struggle during recessions and fall hard when markets correct. Larger companies, on the other hand, get their revenues from different markets and can be dominant in their fields, so they tend to be a bit more resilient in difficult times.
A fund to consider: M&G Global Dividend.
Manager Stuart Rhodes has a bias towards mega and large caps in this fund. He looks specifically for companies with high and rising dividends. The portfolio is constructed in such a manner as to cope with all market conditions and, despite the wide investable universe, only the manager’s best ideas make it into the fund, resulting in a portfolio of around 50 high conviction stocks.
Breaking bonds
Parts of the bond market exhibit different risk and return characteristics at different stages of the investment cycle, so a fund manager with the flexibility to invest in any fixed income asset will have an advantage during difficult or fast-changing markets.
A fund to consider: TwentyFour Dynamic Bond.
This fund pays an attractive yield and is managed with an emphasis on credit risk, to ensure protection of investors' capital and income wherever possible. It differs from most strategic bond funds due to a consistent weighting to asset-backed securities, an area in which the team specialises. It currently has around a third of the portfolio is AAA-rated bonds and a third in BB. It also has about 10 per cent in emerging markets and 12 per cent in asset-backed securities.
Low correlation
If everything around you is going down, an asset that maintains its value, or even goes up slightly, could be a portfolio-saviour. Therefore, having exposure to funds with a lower correlation to mainstream assets may be another good option in the face of more market volatility.
A fund to consider: Jupiter Absolute Return.
It is rare to find a fund with such low historic correlation to other asset classes, even in the absolute return space. Manager James Clunie has a strong track record of generating a positive return in both rising and falling markets by holding both long and short positions in companies from around the globe. There is a strong quantitative element to the fund’s process, informed by the manager’s academic background.
Darius McDermott is managing director of FundCalibre. The views expressed above are his own and should not be taken as investment advice.