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The best funds to navigate another ‘Black Monday’

18 October 2017

Several investment professionals tell FE Trustnet which fund they would trust the most to protect their portfolios against a market downturn.

By Lauren Mason,

Senior reporter, FE Trustnet

Premier Defensive Growth, Jupiter Absolute Return and JPM Global Macro Opportunities are among some of the funds best-suited to navigate another ‘Black Monday’-style economic downturn, according to several investment professionals.

This comes one day away from the 30-year anniversary of ‘Black Monday’, when markets crashed out of a five-year bull run within a matter of hours.

In the below article, industry commentators give their thoughts on which funds they would trust most to protect them on the downside, should another market sell-off occur.

 

Premier Defensive Growth

Ben Willis, head of research at Whitechurch Securities, would pick a fund that is the next best thing to cash. As such, he opted for Premier Defensive Growth, which has four FE Crowns and resides in the IA Targeted Absolute Return sector.

“This is such a dull fund, but in a good way in that it targets a 4 per cent annualised return whilst carefully controlling risk,” he said.

“It is exactly the boring, risk averse and diversified fund you would want to protect capital if there is a big shake out in risk assets, as it would protect capital and significantly limit losses.”

Premier Defensive Growth has been headed up by Paul Smith since 2010. Over this time frame, it has outperformed its Libor 3 Month benchmark by 19.22 percentage points with a total return of 23.4 per cent.

Performance of fund vs benchmark under Smith

 

Source: FE Analytics

It has done so with an annualised volatility of 1.82 per cent and a maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 1.82 per cent. As a point of reference, the FTSE All Share’s drawdown over this time frame is 14.5 per cent.

Premier Defensive Growth has a clean ongoing charges figure (OCF) of 0.85 per cent.

 

Jupiter Absolute Return

Rob Morgan, pensions and investment analyst at Charles Stanley Direct, believes Jupiter Absolute Return is a genuine portfolio diversifier and would cope well during a market sell-off.

He said: “Aiming to produce steady, positive returns, manager James Clunie’s approach combines traditional ‘long’ positions in stocks he believes are undervalued with ‘short’ positions in ones he believes are overpriced where he can profit from any fall in value.

“Mr Clunie is developing a reputation for shorting so-called ‘glamour stocks’, notably in the technology sector, which have exciting investment stories – innovative products, business models or star entrepreneurs –  but whose prospects he believes are potentially hindered by unhealthy balance sheets.”

Morgan added that, given market sentiment towards ‘glamour’ stocks is likely to be most affected during falling markets, a downturn could actually be positive for the fund’s performance overall.


Over the four years that Clunie has been at its helm, the £545m fund – which also resides in the IA Targeted Absolute Return sector – has returned 16.64 per cent compared to its Libor 3 Month benchmark’s return of 2.06 per cent. It has done so with an annualised volatility of 5.27 per cent and a maximum drawdown of 3.36 per cent.

Jupiter Absolute Return has a clean OCF of 0.86 per cent.

 

JPM Global Macro Opportunities

Adrian Lowcock, investment director at Architas, said the £807m JPM Global Macro Opportunities fund could stand investors in good stead, as its focus on the macro means the team should be well-placed to spot early signs of a repeat 1987 crash.

The fund’s aim is to deliver positive returns across all market conditions as well as prioritising capital preservation, which should protect investors from the worst during any sell off,” he explained.

“Current themes include Japanese economic recovery, global political divergence and China in transition.”

He added: “The ability of the fund to invest in a range of asset classes from cash and bonds to equities means the fund is less likely to be fully exposed to falls of stock markets. At the same time the fund can use derivatives to profit by selling companies which gives the fund greater flexibility in falling markets.”

Headed up by James ElliotShrenick Shah and Talib Sheikh since its launch in 2013, the absolute return fund has outperformed its Libor GBP 1 Month benchmark by 45.65 percentage points with a total return of 47.7 per cent over this time frame.

Performance of fund vs benchmark since launch

 

Source: FE Analytics

Also since launch, it has an annualised volatility of 7.41 per cent and a maximum drawdown of 9.78 per cent.

JPM Global Macro Opportunities has a clean OCF of 0.78 per cent and yields 1.1 per cent.

 

Odey Odyssey

Daniel Adams, senior investment analyst at Psigma, said Tim Bond and Dipankar Shewaram’s Ireland-domiciled Odey Odyssey fund would provide good diversification as part of an alternatives bucket in the case of a market sell-off.

“If you’re negative on the world, that’s the fund you want to own because it’s effectively short everything so that should do well if the markets sell off,” he explained.

“The recent performance does worry me but it’s balancing the rest of the portfolio. If that’s doing badly, it means everything else in the portfolio is doing really well, so at a portfolio level we’re comfortable with that.

“So having something like this which will counteract any sell-off is a good option and, in the event of a sell-off, it should do pretty well.”


Since its launch in 2011, the $143m hedge fund has returned 14.81 per cent but has done so with a maximum drawdown of 33.2 per cent and an annualised volatility of 13.36 per cent.

The managers are currently short a majority of the market because they believe central bank policy will push real interest rates higher and risk spreads wider.

“These two factors are likely to result in a decline in the prices of most assets – particularly more risky assets – over this period,” they explained in their latest factsheet.

Odey Odyssey has a clean OCF of 0.94 per cent.

 

Personal Assets trust

On the closed-end side, Tilney Bestinvest’s Jason Hollands said the Personal Assets trust – which is currently trading on a 1.1 per cent premium – would be a good diversification tool.

“When the sky falls in, one investment you want to be holding is Personal Assets trust,” he explained.

“This trust has a strong capital preservation ethos and has been very defensively positioned for some time because of concerns that asset prices have been too distorted by central bank pump priming.

“The trust currently has 10 per cent in gold bullion, 7 per cent in cash, 37 per cent in T-bills and index-linked gilts and 46 per cent in blue-chip equities with strong free cash flow generation and robust balance sheets.”

Since FE Alpha Manager Sebastian Lyon has been at the trust’s helm, it has returned 119.93 per cent compared to its FTSE All Share benchmark’s return of 215.36 per cent.

Performance of fund vs benchmark since March 2009

 

Source: FE Analytics

However, it has done so with a significantly lower annualised volatility of 7.43 per cent and maximum drawdown of 11.3 per cent.

The £855m trust yields 1.4 per cent and has an ongoing charge of 0.95 per cent.

 

Is there any one fund better than others?

Martin Bamford, managing director at Informed Choice, said he approaches downside protection through diversification across a spread of uncorrelated assets and through holding investments for a long period of time.


He said: “Hedge funds and absolute return fund are one option to consider, but are too inconsistent and often very expensive.

“The trouble is, we can’t predict when market corrections might take place, or how quickly markets will recover afterwards, so downside protection can come at a very high cost and result in missing out on growth opportunities.”

Bamford said it is “nearly impossible” to select funds with a good track record of capital preservation because, in the last 10 years, there has been such little market downside.

“Even if you picked the worst performing fund in the IA Global sector (Henderson Multi-Manager Global Select), you still would have made 33.64 per cent in the last decade,” he reasoned.

“It’s a rubbish return compared to the top performer, Baillie Gifford Discovery at 251.31 per cent, but it goes to show how difficult it has been to lose money in these markets.”

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