With global growth slowing and markets seeing a sharp pullback in areas responsible for much of the bull run over the past decade, many investors are looking to add some protection to their portfolios in the year ahead.
As a result, The Share Centre's junior analyst Thomas Rosser highlights five funds that offer exposure to more obscure areas – helping to diversify your portfolio away from the main market in case it suffers a major correction.
Following the return of volatility in 2018, many income investors will be paying closer attention to capital preservation this year. Rosser said the value-focused Schroder Income fund represents a good bet for anyone with an eye on the downside
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“As a largely UK focused fund with overweight positions in consumer services, this fund should stand well if markets decline further due to the non-cyclical nature of the holdings,” the analyst explained.
“Schroder Income also has the benefit of holding a number of large-cap UK firms with global operations that will benefit if sterling weakens.
“Dividend growth-focused funds tend to have lower volatility than growth-orientated funds, thus the fund could potentially be better insulated from a sharp market downturn. However it is also unlikely to outperform in a strongly rising market – but it’s doubtful that we would see this with slowing global growth.”
The analysts at Square Mile are also fans of the fund, saying: “The strategy deployed by managers Nick Kirrage and Kevin Murphy is a credible one, and a little different from the more traditional equity income approach, which should add value over the longer term.”
Data from FE Analytics shows Schroder Income has made 117.43 per cent since managers Murphy (pictured) and Kirrage took charge in May 2010, compared with 86.62 per cent from its IA UK Equity Income sector and 81.82 per cent from the FTSE All Share.
Performance of fund vs sector and index under managers' tenure
Source: FE Analytics
The fund is yielding 3.65 per cent. It is £2.2bn in size and has ongoing charges of 0.91 per cent.
Ned Neylor-Leyland’s fund provides exposure to gold and silver bullion as well as gold and silver listed securities. Rosser said this strategy typically outperforms when precious metals are appreciating or in a bull cycle.
“Silver typically outperforms gold when both are rallying, thus providing a further boost to returns when compared with gold-only funds,” he added.
“Gold has also maintained its purchasing power over the long term despite short-term volatility. One reason that gold should have a place in a diversified portfolio is that it tends to respond positively to events that cause the value of fixed income and equities to fall. So it should provide a supportive backstop if market sentiment wanes further from here.”
Data from FE Analytics shows that Merian Gold and Silver has made 15.31 per cent since launch in March 2016, marginally ahead of the gains from the S&P GSCI Gold Spot index, but with much higher volatility – the fund’s maximum drawdown over this time is 40.45 per cent.
Performance of fund vs index since launch
Source: FE Analytics
The fund is $276.3m in size and has ongoing charges of 0.96 per cent.
Royal London Sterling Extra Yield Bond
While the Fed’s rate-hiking cycle has sent many investors fleeing from fixed income, FE Alpha Manager Eric Holt’s Royal London Sterling Extra Yield Bond fund managed to eke out a positive return last year
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“A highly diversified portfolio that focuses on bonds supported by stable income streams and structural enhancements, this fund should be somewhat protected in times of market turbulence,” added Rosser.
“In recent months, uncertainty surrounding economic growth and low interest rates has highlighted income-generating assets as an attractive proposition. The manager of this fund has over 35 years’ experience and is well seasoned to deal with market fluctuations and interest rate risk.”
Royal London Sterling Extra Yield Bond has made 220.47 per cent since launch in April 2003, compared with 182.95 per cent from the FTSE Actuaries British Government Over 15 Years Index and 97.98 per cent from its IA Sterling Strategic Bond sector.
The £1.85bn fund is yielding just over 6 per cent and has ongoing charges of 0.83 per cent.
First State Global Listed Infrastructure
Infrastructure typically has stable, defensive and inflation-protected cash flows and capital growth opportunities. As a result, Rosser said the sector will grow in importance if the economic outlook becomes more challenging.
“This fund performs best in relative terms in declining markets due to the economic insensitivity of the underlying holdings and the attractive yields on offer,” he explained.
“Regulated returns in this sector generally benefit from falls in bond yields.
“Moving into economic uncertainty we could see a ‘flight to quality’ as investors buy high-quality bonds, therefore pushing bond prices up and yields down, and so benefiting the fund.”
The analyst said the high level of consistency in the fund’s mandate would suit more cautious equity investors. However the portfolio also contains some growth holdings, typically stemming from companies that are expanding their asset base.
“This First State fund offers a specialist area of the global equity market that is largely under-researched and can be used as a low-risk diversifier within an equity portfolio,” he finished.
First State Global Listed Infrastructure has made 147.86 per cent since launch at the start of 2010 compared with 172.92 per cent from the FTSE Global Core Infrastructure index and 101.97 per cent from the IA Global sector.
The £2bn fund has ongoing charges of 0.8 per cent and is yielding 3.14 per cent.
Baillie Gifford Positive Change
A growing number of investors are taking sustainability and ESG (environmental, social and governance) issues more seriously, especially millennials. Rosser said the Baillie Gifford Positive Change fund represents one option for anyone who wants to put these considerations at the forefront of their investment strategy.
“This relatively new fund from Baillie Gifford invests in companies whose products or behaviour makes a positive impact in one of four areas,” the analyst said.
“These pillars that underpin stock selection include: social inclusion & education, environment & resource needs, healthcare and finally quality of life.”
Rosser said companies that deal with large social and environmental issues often have significant growth potential; as a result, this fund could deliver sustainable returns over a long investment horizon.
“This fund arguably offers a vastly different proposition by implementing positive screening processes rather than the negative screening that many traditional sustainability funds use,” he continued.
“Going forward, funds such as these may become increasingly popular due to the changing demographics of investors. Like the First State fund, this portfolio has global reach but has a stronger growth bias.”
Although Baillie Gifford Positive Change was only launched at the start of 2017, it has already made 50.8 per cent, compared with 7.49 per cent from its MSCI AC World benchmark and 7.4 per cent from its IA Global sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £62.3m fund has an OCF of 0.6 per cent.