A gold equities fund, one of the biggest absolute return portfolios and a resolutely defensive UK equity income strategy are three of funds that could help protect portfolios if the coronavirus sell-off continues, according to Willis Owen’s Adrian Lowcock.
Stock markets have endured a brutal few days of falls as the Wuhan coronavirus continued to spread around the world and investors become concerned about its ultimate impact on the global economy.
Last night’s session was particularly tough for the US and markets in the UK and Europe opened this morning with sharp falls, with many forecasting some more challenging times ahead as the world struggles to deal with the outbreak.
Price performance of indices in Feb 2020
Source: FE Analytics. In local currencies
Lowcock, head of personal investing at Willis Owen, said: “The coronavirus contagion is a rapidly evolving situation and fears of its spreading are intensifying as multiple reports of cases emerging across the globe add to the sense of panic.
“Clearly it is serious. At this point, the lack of understanding of the virus and how far it could spread generates fear, and this fear of the unknown is impacting on stock markets across the world.
“The severity of the sell-off is rightly alarming for investors – the FTSE 100 alone has now shed more than 10 per cent from its recent peak, and other indices are down similar amounts. Up until this week markets were fairly relaxed about it as they hoped the impact was limited to China and thus the feed through to global growth would be short term and limited. That’s changed now there have been significant breakouts, in Italy particularly.”
Lowcock added that investors should ensure portfolios are diversified, with equities complemented with defensive assets that can protect against falling markets. Below are three funds that he thinks are worth considering.
BlackRock Gold & General
Lowcock’s first pick is the £1bn BlackRock Gold & General fund, which is managed Evy Hambro and Tom Holl. It offers exposure to gold and other precious metals by investing in listed mining companies.
“The team looks at detailed commodity and company research paying close attention to risk and liquidity,” Lowcock explained. “The fund has a bias towards larger producers as they often give the best exposure to commodity prices for the risks and have the ability to grow production in a cost-effective way.”
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Over the past 10 years, BlackRock Gold & General has made a total return of just 2.70 per cent, reflecting weakness in the gold price. However, it has risen 15.60 per cent in the past three months as investors flocked to the yellow metal for its safe haven status.
FE Analytics shows that the fund had a downside capture ratio to the MSCI World of 73.12 per cent for the past decade (meaning it only captured about three-quarters of global equities’ negative performance during down market). However, it has been significantly more volatile at times.
BlackRock Gold & General has an ongoing charges figure (OCF) of 1.18 per cent.
BNY Mellon Real Return
Next up is the £5.9bn BNY Mellon Real Return fund, which is a well-respected member of the IA Targeted Absolute Return sector. Over the last 10 years, it has made 48.22 per cent while its average peer is up 25.13 per cent; however, it has lagged its benchmark over this time frame.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“Manager Suzanne Hutchins’ priority is to protect investors money and then over the long-term look to grow it at around 4 per cent above cash. Hutchins runs an unconstrained portfolio and has a flexible approach,” Lowcock said.
“She adopts Newton’s thematic research to find opportunities, and the fund has a core element which invests in bonds and shares with a long-term view and low turnover. This is complemented by more tactical, short-term investments in cash, government bonds and derivatives in order to reduce the risk.”
The fund’s defensive numbers look very strong – it has a downside capture ratio against the MSCI World of just 36.61 per cent for the last decade while its annualised volatility stands at 5.07 per cent and it had a maximum drawdown of 6.27 per cent.
BNY Mellon Real Return (which was formerly known as Newton Real Return) has a 0.85 per cent OCF.
Trojan Income
The final of Lowcock’s three defensive funds picks is Trojan Income. This £3.4bn fund is a member of the IA UK Equity Income sector, where it has made a top-quartile total return of 143.85 per cent over the past 10 years.
Its downside capture ratio against global equities is 68.21 per cent, which is the fifth best in its peer group. Its annualised volatility of 8.59 per cent over the past decade is the second lowest in the sector, while its 9.11 per cent maximum drawdown is the lowest.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“Although this fund invests in shares primarily from the FTSE 350, manager Francis Brooke looks to preserve investors capital and does this by investing in companies that produce steady, long-term income and capital growth,” Lowcock said.
“He has a bias towards larger companies and tends to favour more defensive sectors such as healthcare and likewise has a low exposure to cyclical stocks.”
Reflecting this, Trojan Income’s top holdings include the likes of Unilever, GlaxoSmithKline and British American Tobacco. The portfolio has between 40 and 50 stocks, with low turnover.
The fund has an OCF of 1.02 per cent and is yielding 3.74 per cent.