M&G’s head of retail fixed interest Jim Leaviss (pictured), says this is likely to be followed by similar actions from the other two ratings agencies. He warns that Moody's decision is a response to a crisis that has been building up for a generation: a country that simply cannot afford to pay for the benefits expected by an aging population.
"Everything that I have bought for my family or myself over the last few years has 'global' in the name," he said.
"This was baked into the cake years ago and I don’t know that we [the UK] will ever get the AAA rating back."
While there are few who would go as far as saying the downgrade is good news, some experts believe there are a number of ways that investors can protect themselves from the downgrade – and even make money from it:
M&G Global Macro Bond
Damien Fahy, head of research at FundExpert, says that reducing exposure to sterling and increasing it to the dollar is key.
"Some analysts, and we sympathise with them, believe we will end up at parity with the US dollar, which would be hugely profitable for UK investors who have bought dollars," he said.
Fahy says Jim Leaviss’ £349.8m M&G Global Macro Bond is a good choice for investors looking for this dollar exposure.
Leaviss told FE Trustnet that he has been expecting this downgrade for some time and has prepared his portfolio accordingly.
"We have had an extreme underweight position to sterling for getting on for nine months now."
"M&G Global Macro Bond has zero sterling exposure, but rather a number of other currencies."
"The dollar is most attractive, we have 70 per cent exposure to the US dollar. We do not want to own sterling at all."
"We are also underweight duration because lower duration we think there isn’t a great deal of value in 10-year government bonds at the current price."
M&G Global Macro Bond has beaten its IMA Global Bonds sector average over three and five years, according to data from FE Analytics.
Over the long-run it has been even more effective. Leaviss has run the fund since 1999 and FE Analytics data shows it has made 103.65 per cent over the last decade compared with a sector average of 75.54 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund is available with a minimum initial investment of £500 and has a total expense ratio (TER) of 1.41 per cent.
Artemis Income
For income-seekers, Fahy likes the £5bn Artemis Income fund, run by FE Alpha Managers Adrian Frost and Adrian Gosden.
"Some UK equity income funds invest heavily in UK-quoted global companies which report in dollars, such as BP or Glaxo," he said. "This will underpin income payouts in 2013 for funds such as Artemis Income."
The fund is a top-quartile performer in the IMA UK Equity Income sector over five and 10 years, according to data from FE Analytics, and is currently yielding 4.1 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund is packed with large cap stocks popular among income investors: BP, Shell and GlaxoSmithKline are the three biggest positions.
It is available with a minimum initial investment of £1,000 and has a TER of 1.55 per cent.
Henderson Index-Linked Bond
Leaviss says that index-linked gilts are a good investment to hold. He has 10.8 per cent of his M&G Global Macro Bond fund in the instruments.
Inflating away the country’s debt is the only route open to the Government, the manager explains, making the inflation-proof returns of these bonds useful.
Henderson Index-Linked Bond has delivered 40.37 per cent over three years, the best returns of any retail fund in the IMA UK Index Linked Gilts sector.
It is available with a minimum initial investment of £1,000 and has a TER of 1.07 per cent.
It is managed by Phillip Apel and Mitul Patel.
Liontrust Special Situations
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says that for equity exposure there is no reason to avoid the UK, but selecting the right stockpicker is essential.
"In this environment, there will be companies that are able to take advantage and those which cannot," he said.
"We have seen that British companies are able to grow even though the wider economy remains sluggish."
"Fund managers with excellent stockpicking skills are able to identify those companies that can outperform."
Lowcock says FE Alpha Managers Anthony Cross and Julian Fosh fit the bill. He praises them for their ability to find companies with a dominant position in their industry.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Data from FE Analytics shows that this five crown-rated fund is second in the IMA UK All Companies sector over three and five years, returning 111.25 per cent to investors over the latter time period.
This is particularly impressive given the sluggish market of recent years and compares favourably to the 33.29 per cent made by the FTSE All Share over the same time.
The managers benefit from having roughly 25 per cent in the FTSE 250 and FTSE Small Cap indices and a further 20 per cent in the AIM, areas with greater growth potential but also where stockpicking is crucial.
"They look for companies which combine this with a dominant or secure market position in the UK, or exposure to faster-growing international markets, as companies with these qualities have the potential to grow faster than their peers," Lowcock said.
"This approach has worked well in recent years and I believe it will continue to bear fruit over the long-term."
The fund requires a minimum initial investment of £1,000 and has a total expense ratio (TER) of 1.92 per cent.
Old Mutual UK Smaller Companies
Lowcock also likes FE Alpha Manager Dan Nickols’ £551m Old Mutual UK Smaller Companies fund, which has beaten its IMA UK Smaller Companies average over three and five years. It has made 64.2 per cent over the longer period.
"Manager Daniel Nickols expects volatility to continue as equities remain sensitive to political risk," Lowcock said.
"The fund is positioned for a prolonged period of low growth from developed-world economies."
"Nickols invests in companies with 'self-help' characteristics that can grow earnings independent of the wider economic environment."
"In addition, the fund also has a number of higher-risk special situations stocks which could offer good returns over a longer timescale."
The fund is available with a minimum initial investment of £1,000 and has a TER of 1.94 per cent.