Trojan Income, LF Lindsell Train UK Equity and Janus Henderson UK Absolute Return are three funds that AJ Bell’s head of active portfolios Ryan Hughes would complement each other in a portfolio together to see through the end of the economic cycle. 
As central banks begin to withdraw the stimulative quantitative easing programmes characteristic of the post-financial crisis era and start to raise rates, focus has shifted to how long the economic cycle has left to run.
Indeed, some investors have already started to prepare for the end of the cycle as equity markets have reached new heights in the decade since the crisis, although others have argued that there is still some upside for markets.
Performance of major markets over 10yrs
Source: FE Analytics
Although AJ Bell’s Hughes (pictured) gave no indication as to when he believes the end of the cycle will come, he admitted that the next stage will not be as kind to investors as the current phase.
“If we see a change in the current economic phase, it is likely to be towards one that is more challenging,” he said.
He added that funds with a more defensive approach would be his preference to “help navigate a risk-off environment”.
As such, Hughes highlights three funds that could help see investors through the end of the current market cycle.
Trojan Income
Hughes’s first defensive fund pick is Troy Asset Management’s £2.9bn Trojan Income fund managed by FE Alpha Manager Francis Brooke, which he said has the ability to protect on the downside.
“There is a very clear investment philosophy towards preserving capital in times of trouble and they have proven that they can navigate challenging times well,” Hughes explained.
However, the fund’s defensive nature makes it more likely to lag the wider market in times of more aggressive growth.
Yet, Hughes said he would expect the fund to manage itself well in a worsening economic environment.
Over the past decade the fund has had the second-best downside capture ratio in its sector of 71.82 per cent. This ratio measures how much a fall in the fund is linked to a fall in its benchmark, in this case the FTSE All Share index.
“The portfolio is positioned towards high quality names such as Unilever, GlaxoSmithKline and Vodafone but will also look at heavily out of favour companies that offer attractive but sustainable dividend yields,” said Hughes. “I would expect this fund to hold up very well if the economic cycle turned more negative.”
The fund has generated a total return of 147.47 per cent over 10 years compared with a gain of 112.03 per cent for the average IA UK Equity Income fund and a return of 107.66 per cent for the benchmark
Trojan Income has a yield of 3.93 per cent and an ongoing charges figure (OCF) of 1.02 per cent.
LF Lindsell Train UK Equity
Up next is another long-only fund in the five FE Crown-rated LF Lindsell Train UK Equity, overseen by FE Alpha Manager Nick Train.
As with the Trojan Income fund, Hughes likes this Lindsell Train UK Equity for its focus on quality stocks.
“This fund uses a very long approach that looks to identify very high-quality businesses that can compound their earnings over time,” said the AJ Bell fund picker.
“The portfolio is positioned towards strong global brands that can deliver high rates of return over a multi-year basis and the manager believes that the market persistently under values these abilities.”
Examples of such holdings in Train’s fund include Diageo, Unilever, RELX, London Stock Exchange and Hargreaves Lansdown.
Hughes said the quality companies that the manager invests in may be in favour if we move into a new economic phase.
“In times of difficulty, these types of companies could well be in high demand which could help the strategy mitigate broad market volatility,” he added.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Over 10 years the fund has delivered a total return of 331.17 per cent, compared with a gain of 111.70 per cent for the average IA UK All Companies sector peer and a 107.66 per cent return for the FTSE All Share index benchmark.
LF Lindsell Train UK Equity has an OCF of 0.70 per cent.
Janus Henderson UK Absolute Return
Finally, Hughes would pair these two long-only funds with a long/short fund: the £2.5bn Janus Henderson UK Absolute Return fund.
“This fund uses a long/short approach to look to generate positive returns regardless of market conditions and has an excellent long-term track record of protecting capital in volatile periods,” said Hughes.
Indeed, the fund has had a consistently lower three-month maximum drawdown than the FTSE All Share when the market has sold off since the fund launched nine years ago.
Three-month rolling maximum drawdown over 9yrs
Source: FE Analytics
Janus Henderson UK Absolute Return is jointly run by FE Alpha Managers Ben Wallace and Luke Newman, who AJ Bell’s Hughes said have “significant flexibility to protect the portfolio and can go net short if required.”
He added: “The fund can look to use overseas stocks if required and given its absolute return approach, it would combine well with the other funds long only focus.”
Since launch the fund generated a total return of 67.20 per cent compared with a 34.85 per cent gain for the average fund in the IA Targeted Absolute Return sector. It should be noted, however, that the sector is home to a range of strategies targeting different asset classes and geographies.
Janus Henderson UK Absolute Return has an OCF of 1.05 per cent.