The US Federal Reserve surprised the markets when it performed a dovish U-turn last month, but there are funds that can benefit from this – as well as some that might be good if this fails to support growth. 
At the start of 2019, policymakers at the Fed were suggesting that several hikes to interest rates could be carried out over the coming year. However, in March it changed its outlook and said it expected no rate increases for the rest of 2019.
Thomas Rosser, junior investment analyst at The Share Centre, said: “The U-turn by the central bank could be perceived as an attempt to stimulate a slowing economy, but also could reflect a combination of concerns about international macroeconomics and financial market volatility.
“‘Hawkish’ and ‘dovish’ are terms used to reflect the general sentiment of the central bank, the latter is used as a guard against deflation and usually involves lowering interest rates to encourage more spending on goods and services therefore stimulating the economy.”
Performance of indices during 2019
Source: FE Analytics
This shift in tone by the Fed supported the rally that has been in play over the early months of 2019, adding to hopes that continued loose monetary policy will continue to buoy markets. As can be seen in the above chart, the US has led the way in this rally.
However, this has come at the same time as the yield on US 10-year Treasuries fell from 4.22 per cent to around 2.5 per cent. What’s more, the three-month and 10-year yield curve recently inverted – which is often seen as “a harbinger of recession”.
“According to research by Swiss private bank Pictet, the yield curve inverts 18 months before a recession. Taking this into consideration, there is some hope the equity rally we’ve witnessed so far this year may have further to run yet,” Rosser said.
“Moreover, a number of economists and investors are now beginning to price in the possibility of rate cuts this year, potentially providing a boost to the equites market and an extension of the already long economic cycle.”
Below, the investment analyst highlights the funds that could do well if the bull run continues as well as those that might hold up if a downturn is on the cards.
Rosser argued that there are a number of reasons that suggest the US economy will continue to be strong, including a strong labour market, real wage growth, increased government spending and an uptick in business investment.
FE Alpha Manager Terry Smith’s Fundsmith Equity fund is one strategy that he thinks could benefit if sentiment improves and the business cycle is extended. The £18.6bn fund has been a standout performer in the bull run that followed the financial crisis, currently sitting in the IA Global sector’s top decile over one, three and five years; since launch in November 2010, it has made the highest return of its peer group.
Performance of fund vs sector and index since launch
Source: FE Analytics
“This is a very concentrated fund likely to be more defensive than some of its peers due to the non-cyclicality of the underlying holdings,” said Rosser. “It focuses on high-quality global businesses that can sustain a high return on capital employed and deliver strong free cash flow yields.
“The bottom-up stock research helps to identify companies with significant financial strength and 65 per cent of the portfolio is exposed to American equities.”
Fundsmith Equity has a 1.05 per cent ongoing charges figure (OCF).
The second fund that could benefit from a continued bull market is T. Rowe Price US Large Cap Growth Equity. This $2bn fund is managed by Taymour Tamaddon and has made top-quartile total returns in the IA North America sector over the one, three, five and 10 years.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“The strategy is well-positioned to capitalise on market fluctuations and analysts’ ideas compared to its more diversified large-cap siblings,” the investment analyst said.
“It employs a well-executed approach in seeking companies with strong earnings potential over the next three years. Furthermore, the addition of a few defensive names to the portfolio provided some downside protection in the equity market sell-off.”
T. Rowe Price US Large Cap Growth Equity has a 0.79 per cent OCF.
Turning to what to hold if the bond market is right and a recession is likely, The Share Centre said that diversification is “especially important” as it helps to minimise risk.
The first fund suggested by Rosser is M&G Global Government Bond. This $145.8m fund is headed up by FE Alpha Manager Claudia Calich with Jim Leaviss as deputy.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“The fund aims to deliver income and capital growth by investing at least 70 per cent of the portfolio in investment grade global government bonds set to benefit if investors embark on a flight to quality as a result of gloomy global macroeconomic signals, which in turn pushes up bond prices,” he explained.
Calich’s investment approach starts with a top-down assessment of the macroeconomic environment, examining factors such as the likely path of economic growth, interest rates and inflation as these underpin bond valuations and allow the manager to identify overarching macroeconomic and policy trends.
M&G Global Government Bond has an OCF of 0.54 per cent.
Rosser also thinks an allocation to gold – which is seen as a classic safe haven in time of market turmoil – could be a good portfolio addition if more challenging conditions are on the horizon. He highlighted ETFS Gold Bullion Securities as a good option.
“Gold is typically negatively correlated to equity markets so it can diversify a portfolio and protect against inflation,” he explained.
“In general gold starts to look attractive when markets weaken as investors look for safe havens. If an investor held this ETF [exchange-traded fund] from the start of 2008 to the end of 2009 they would have made a 55.44 per cent return.”
ETFS Gold Bullion Securities has a total expense ratio of 0.40 per cent.