While there are few signs that the current economic expansion is about to come to an end, ongoing concerns over trade tensions and the impact on global growth could lead to further volatility at the late stage of the cycle.
As such, it may be time for investors to consider how best to protect portfolios in the event of a surprise downturn.
One of the best ways to do this, according to Wise Investment’s Vincent Ropers, is to spread exposure across a range of asset classes and strategies.
“Investors have been hitting pockets of turbulence in recent months as volatility has returned to the markets,” said Ropers.
“Rising volatility is a key characteristic of late-cycle investing and a reminder [that] investors should be prepared to manage an increasing number of dangers lurking on the horizon.”
Against this backdrop, the manager said he has set about blending defensive anchors and uncorrelated plays within the five FE Crown-rated TB Wise Multi-Asset Growth fund he co-manages with Tony Yarrow and Philip Matthews.
Below, Ropers has highlighted several funds that could offer investors downside protection.
One way that the manager has added protection to the portfolio is to look for less risky asset classes.
An example is the £1.8bn, five FE Crown-rated TwentyFour Absolute Return Credit fund, which invests in corporate bonds with a shorter duration, limiting volatility compared with their longer-dated counterparts.
Aiming to achieve absolute returns over a period of three years, manager Chris Bowie has delivered a 10.16 per cent gain in the three years to end of May 2019.
While equities are usually one of the riskiest areas to invest, Ropers said that there are some strategies where the managers are more cautious, such as LF Ruffer Equity & General fund.
Performance of fund vs sector & benchmark under manager
Source: FE Analytics
The £163.4m fund overseen by FE Alpha Manager Alex Grispos “takes a very forensic approach to investing in global equities”, said Ropers. In addition, the manager has the flexibility to hold high levels of cash and defensive assets such as gold.
As the above chart shows, since Grispos joined the fund in 2007 it has only had one down year: 2018.
Another tactic followed by Ropers is allocating to multi-asset absolute return strategies, such as TM Fulcrum Diversified Core Absolute Return and the five FE Crown-rated SVS Church House Tenax Absolute Return Strategies funds.
A more focused absolute return strategy in the TB Wise Multi-Asset Growth portfolio is Janus Henderson UK Absolute Return, overseen by FE Alpha Managers Ben Wallace and Luke Newman, which Ropers said can benefit from upwards and downwards moves in UK share prices.
As well as strategies likely to provide downside protection, diversification is a key theme in the portfolio for the late-cycle environment.
One traditional diversifier is gold, which while it may have lost “some of its glimmer… against a muscular dollar” remains a “powerful weapon” against prolonged volatility and a hedge against unexpected changes in interest rates, inflation and a weaker dollar, said Ropers.
As such, the team behind TB Wise Multi-Asset Growth have added Ned Neylor Layland’s $301.9m Merian Gold and Silver fund and the BlackRock Gold & General fund, managed by Evy Hambro and FE Alpha Manager Tom Holl.
Performance of funds over 3yrs
Source: FE Analytics
Both funds invest in precious metals stocks and aim to take advantage of demand trends. Neylor Layland’s fund is able to hold gold bullion when he is feeling less bullish about equity markets.
Another portfolio diversifier is currency and rates, which can reduce correlation between assets, with the offshore Pacific G10 Macro Rates its preferred strategy to achieve this. Ropers noted that managers Richard Marshall and Shayne Dunlap target positive returns with a low correlation to equity and bond markets.
Finally, the utilities and infrastructure sectors can provide diversification through access to companies with a long track record of delivering cash flows, dividend payments and high yields on offer from water and waste, electricity, gas and renewable energy providers.
“Their defensive nature, tied to structural growth, is also favoured as investors rotate out of cyclical trades such as tech or industrials during periods of choppy market weather,” said Ropers.
“To access the defensive, dividend compounding potential of utilities and infrastructure, we have a position in the Ecofin Global Utilities & Infrastructure Trust and the LF Miton Global Infrastructure Income fund.”
There are also some idiosyncratic plays that investors may want to consider for their portfolio, which involves taking less overall equity market exposure.
Examples of this strand include closed-ended strategies such as quality-focused, UK small-cap Odyssean Investment Trust, Japanese smaller companies strategy AVI Japan Opportunity and the emerging markets-focused Mobius Investment Trust.
“While each invest in different areas of the world, they share a common approach of trying to generate returns by engaging with companies,” said the manager.
“This can mean discussing with management new areas of growth for the business or new ways to generate value for investors and distributing it via dividends, share buybacks, etc.”
Ropers added: “Their focus on these specific situations should help insulate them from the movements of headline indices.”
Another idiosyncratic play within the portfolio is the closed-ended Baker Steel Resources Trust, which focuses on early stage companies relatively uncorrelated to the mining cycle.
Finally, the team behind TB Wise Multi-Asset Growth has built a cash position of around 3.5 per cent, allowing it to take advantage of attractive valuations during bouts of volatility.
“As active managers, it is our job to exploit the relative value which has been created by this uncertain environment,” Ropers concluded. “We will continue to look for ways to participate on the upside, while finding strategies that can help us insulate the portfolio from the most violent swings.”
Ropers, who co-manages TB Wise Multi-Asset Growth joined the fund in April 2017. Yarrow has worked on the strategy since launch in March 2004 while Matthews joined in September 2018.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch, it has made a total return of 118.61 per cent against a 88.79 per cent rise in the Cboe UK All Companies index and a 69.40 per cent gain for the average IA Flexible peer.
TB Wise Multi-Asset Growth has an ongoing charges figure (OCF) of 1.20 per cent.