With issues surrounding the valuations of equities and fears that bond yields could rise more quickly if central banks raise interest rates faster than expected, investors could be considering a more defensive approach for their portfolios.
Over the past week, Tilney Group managing director Jason Hollands outlined that there is now only one equity market currently below its long-term price-to-earnings (P/E) average.
Meanwhile, Liontrust fixed income manager Phil Milburn acknowledged that his asset class is overvalued and that he is making his assets “sweat” harder than they have had to previously.
As such, investors are looking for strategies that could protect them through any potential downturn.
Below, the investment team at Seven Investment Management highlight five strategies that investors looking to take a cautious approach could utilise.
TwentyFour Dynamic Bond
First up is the five FE Crown-rated TwentyFour Dynamic Bond fund, which uses a flexible approach across high yield, investment grade and government bonds as well as asset-backed securities.
The £1.7bn fund will also use derivatives in an effort to perform in both rising and declining rate environments throughout the economic cycle.
Since its launch in 2010 the fund has returned 61.16 per cent to investors, a top quartile performance in the IA Sterling Strategic Bond sector and beating the average peer by 16.33 percentage points.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
However, it has been one of the more volatile in the sector over the period (5.81 per cent) with one of the largest monthly maximum drawdowns (10.33 per cent) – the most an investor could have lost if buying and selling at the worst possible times.
Tony Lawrence, senior investment manager at 7IM, said: “It aims to be an all-round performer that tries to deliver a performance across lots of different environments and fits in well with our current concerns about interest rates.
“The fund holds floating rate debt, where payments rise alongside interest rates, and also looks to provide higher yields than conventional short dated bonds.”
It has a yield of 4.53 per cent and a clean ongoing charges figure (OCF) of 0.77 per cent.
NN Global Convertible Opportunities and Fair Oaks Income
Up next are two funds that the 7IM team said take on a more proactive role but still add a defensive quality when things take a turn for the worse.
First up is NN Global Convertible Opportunities, a $1.2bn offshore fund that invests exclusively in convertible bonds and other equity-linked investments.
It was launched in January 2016, during which time it has returned 18.05 per cent, beating its sector and benchmark, as the below chart shows. It has an OCF of 1.85 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Lawrence said: “The convertible bond fund from NN offers us senior unsecured bonds that are convertible into shares at a fixed price. They typically have short durations, offering downside protection with equity upside participation.
“We like this fund’s thematic approach, which allows them to look to focus on the big picture, rather than a tactical, traditional sector approach, given these often have a diverse set of return drivers.”
Meanwhile, Fair Oaks Income is a five FE Crown-rated investment trust that invests in floating-rate senior secured loans in Europe and the US.
The $439m trust has been the best performer in the IT Debt sector since its launch, returning 53 per cent to investors, versus the average peer’s 33 per cent.
It has a yield of 14 per cent, according to the Association of Investment Companies, and a management fee of 1 per cent plus a 15 per cent performance fee for returns above 7 per cent per year. It is currently trading on a permium of 2.7 per cent to net asset value (NAV).
“Looking at Fair Oaks Income, meanwhile, this is a closed-ended investment company in the specialist debt sector focusing primarily on high quality US floating rate senior secured loans,” Lawrence said.
“The closed-ended structure is a useful vehicle to access these types of assets due to the illiquid nature of the underlying assets.”
F&C Global Equity Market Neutral and the Angel Oak Multi-Strategy Income
The next two funds both try to deliver when asset classes are under pressure but also complement one another as well, according to 7IM.
F&C Global Equity Market Neutral is an absolute return strategy run by Chris Childs and FE Alpha Manager Erik Rubingh since its launch in 2015. It is a long/short strategy that is currently net long 25.3 per cent.
The £672m portfolio has returned 21.84 per cent since its launch in 2015, beating IA Targeted Absolute Return sector average of 4.93 per cent although it should be noted that the sector is quite diverse and broad comparisons are difficult.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Lawrence said: “The fund is a systematically driven fund that has a dispassionate approach, reducing the risk of human error. It is very much about absolute returns too, so is designed to not be too temperamental.”
It has a yield of 0.7 per cent and an OCF of 0.78 per cent.
Angel Oak Multi-Strategy Income on the other hand is an offshore specialist fund focused on residential mortgage-backed securities.
Since its launch in 2015 the fund has returned 16.29 per cent to investors while the FO Fixed Interest Global sector has returned 6.52 per cent. It has an OCF of 0.99 per cent.
“A stronger US economy and buoyant housing market make for an interesting opportunity in mortgage loans where we believe the default risk is low,” Lawrence said
Royal London Cash Plus
Last up is a cash fund, often a key tool in any investor’s armoury and one that provides a good starting point for any investment, the 7IM team said.
The Royal London Cash Plus fund, which sits in the IA Unclassified sector, is managed by Craig Inches and Tony Cole.
The £4.8bn portfolio aims to achieve 0.5-0.75 per cent returns per year above the seven-day Libid (London Interbank Bid Rate) benchmark over a rolling one-year period by investing in money market instruments and some short-dated bonds.
"It is a strong defensive play for those that want experienced hands across a balance of money markets and short-term bonds,” Lawrence said.
The portfolio, which has returned 4.33 per cent to investors since its launch in 2011, has a yield of 0.48 per cent and an OCF of 0.27 per cent.