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Six funds to dampen down your portfolio’s volatility

02 June 2021

Following a forecast of an increase in volatility during the second half of the year, Trustnet asked the experts which funds would be ideal to lessen portfolio volatility.

By Eve Maddock-Jones,

Reporter, Trustnet

Capital Gearing Trust, Personal Assets Trust and JO Hambro Global Opportunities are some of the funds that market experts think could help dampen heightening volatility for investors.

Markets went through a tumultuous time in 2020 with the fastest – and shortest – bear market on record, followed by a sizeable equities rally.

Coming into this year and markets appear to be on a smoother ride as volatility in 2021 seems to be to well below its long-term average. But this could be short-lived: with inflation fears picking up and Covid cases rising again, market experts are expecting more volatility in the latter half of the year.

So for investors looking to lessen the volatility in their portfolios during this time, the market experts gave their fund picks.

 

Close Select Fixed Income

GDIM investment manager Tom Sparke said: “It is difficult to predict which areas of the market may be most, or more pertinently, least affected by changes in monetary policy or more negative economic growth data but I think a high quality, actively-managed bond fund with a structurally low sensitivity to rates would be ideal.”

The fund he thinks meets all these criteria is Close Select Fixed Income.

Run by Stephen Hayde and Eran Hasson the fund aims to provide investors with income and maintain capital over the medium term via investments in sterling corporate and government bonds. This forms a ‘low risk base’ according to Sparke, focusing on a small pool of “highly scrutinized assets chosen for its robust balance sheets and generous yields.”

During the latest volatility test Sparke said that the fund held up well in the inflation-based sell-off, managing to increase its value and maintain its 3.7 per cent yield.

“Unlike many short-dated bond funds there is no requirement for the fund to maintain a lower duration so when it is more appropriate to flex this, the mandate will allow an extension,” Sparke added.

Over the past five years the Close Select Fixed Income fund has outperformed the IA Sterling Strategic Bond sector with a total return of 29.11 per cent.

Performance of fund vs sector and index over 5yrs

 

Source: FE Analytics

The fund has ongoing charges figure (OCF) of 0.48 per cent.

 

JO Hambro Global Opportunities

The next two picks come from FundCalibre managing director Darius McDermott. First is the JO Hambro Global Opportunities fund, which he thinks is a good portfolio for managing volatility because its manager uses cash to dampen volatility if he is worried about markets.

With a high conviction portfolio of 25 to 40 stocks that is unconstrained from the benchmark, the fund made a total return of 61.35 per cent over five years, underperforming both the IA Global sector (94.77 per cent) and MSCI ACWI index (98.67 per cent).

JO Hambro Global Opportunities has an OCF of 0.84 per cent.

Sanlam Enterprise

McDermott’s next pick is Sanlam Enterprise, which is a fund that has the ability to short stocks.

Run by Mark Boucher and Mark Swain, it uses a combination of long and short positions, typically doing so through CFDs (contract for differences).

The use of CFDs means that the fund’s gross and net exposure can be adjusted very quickly, meaning it has a lot of flexibility to react to changing markets, taking advantage of and protecting during volatility

Some of its biggest current long positions are JD Sports, AstraZeneca, Coca Cola and Rio Tinto.

The fund has outperformed the average IA Targeted Absolute Return fund over five years, making 13.82 per cent, but has underperformed the FTSE All Share index during that time.

Performance of fund vs sector and index over 5yrs

 

Source: FE Analytics

Sanlam Enterprise has an OCF of 0.93 per cent.

 

Personal Assets Trust

The next pick is five FE fundinfo Crown-rated Personal Assets Trust, which was chosen by AJ Bell head of active portfolios Ryan Hughes.

Like all Troy Asset Management strategies, FE fundinfo Alpha Manager Sebastian Lyon’s process puts capital preservation at its core with low volatility in mind, making it a “very useful holding to lower overall volatility in a portfolio”.

Hughes added: “Lyon currently expects higher inflation and therefore has his portfolio structured with around 10 per cent in gold and 30 per cent in inflation-linked bonds which should have the effect of diversifying the portfolio from equity market falls.”

The £1.5bn Personal Assets Trust invests in quality blue-chip equities, index-linked bonds, gold and cash. The fund’s equity portion is particular, which is focused on high quality companies and has the ability to generate strong cashflows consistently over time.

“This means that holdings are typically lower volatility, global champions such as Microsoft, Nestle and Unilever that all have the ability to pass through price increases as inflation picks up,” Hughes said.

Indeed, the trust’s 10-year cumulative volatility is the best of the entire IT Flexible Investment sector – 6.58 per cent.

The Personal Assets Trust has underperformed both the sector and index over five years, with a total return of 36.90 per cent.

Performance of fund vs sector and index over 5yrs

 

Source: FE Analytics

It is currently running at a 1.5 per cent premium with no gearing and a dividend yield of 1.2 per cent. It has ongoing charges of 0.86 per cent.

 

BNY Mellon Real Return

Penultimately is the £5.6bn BNY Mellon Real Return fund, picked by independent commentator Adrian Lowcock.

The fund is constructed in a “flexible” way, according to Lowcock, made up of two layers. The first, a stable core element of mainly bonds and equities, which is then complimented with a satellite layer of government bonds, derivatives and cash to reduce volatility and risk.

“The exact weightings in each element will vary with the teams outlook on markets,” Lowcock said.

Managed by Aron PatakiSuzanne Hutchins and Andy Warwick, the fund has made a total return of 27.78 per cent over the past five years, outperforming both the index and sector.

Performance of fund vs sector and index over 5yrs

 

Source: FE Analytics

Holding an FE fundinfo Crown rating of four, BNY Mellon Real Return has an OCF of 0.80 per cent.

 

Capital Gearing Trust

The final pick comes from Dzmitry Lipski, head of funds research at interactive investor, who highlighted the five FE fundinfo Crown-rated Capital Gearing Trust as potential core holding for investors.

“Capital Gearing Trust has two objectives to preserve capital over any 12-month period and deliver returns well in excess of inflation over the longer term,” said Lipski.

“Rather than using exotic strategies or derivatives, the trust approach to avoiding drawdowns has been to hold a highly diversified portfolio of assets with some to be negatively correlated to risk assets.”

The trust only invests in long holdings, utilising a multi-asset portfolio for bonds, equities and property, with small holdings in infrastructure, gold, and cash.

The trust “has been a great preserver of wealth in bear markets, including the dot-com crash and the global financial crisis and most recently during market sell off in 2018 and 2020,” Lipski said.

Indeed it has the third best 10-year cumulative volatility of the IT Flexible Investment sector at 7.72 per cent.

“We view this trust as a good fit as a core holding due to its defensive stance and high levels of diversification. In addition, the trust would complement funds and trusts with more adventurous risk profiles.”

Capital Gearing Trust has made a total return of 29.11 per cent over the past five years, outperforming the IA Sterling Strategic Bond sector.

Performance of fund vs sector and index over 5yrs

 

Source: FE Analytics

It has currently running at a 2.9 per cent discount with no gearing and a 0.9 per cent yield. It has ongoing charges of 0.65 per cent. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.