Four funds for investors turning cautious to consider

Investors have been spooked by recent market developments, but what are the options for those wishing to dial down risk?

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  1. Rob Morgan

Global markets have been hit by a disappointing growth outlook from Germany and China in recent days, igniting fears of a global slowdown. This comes on top of the continued trade war between Washington and Beijing, with some experts warning the two sides are unlikely to reconcile their differences.

Investors have also been spooked by an apparent warning sign from the bond markets. An ‘inverted yield curve’ means that the yield on government debt is lower for ten-year bonds than it is for two-year bonds. This is an unusual development. Normally investors demand a higher yield for longer-dated debt, and an inversion is often taken as a sign that a recession lies ahead.

There are reasons to be more optimistic, though. Although economic growth is expected to slow in most regions, corporate earnings are still forecast to rise by a modest amount this year. Any resolution of the trade dispute between China and the US will be good for sentiment and action by central banks could provide continuing support for equity markets. However, volatility could continue in the shorter term.

For those wishing to turn more cautious what are the options in a portfolio? Moving into cash is one possibility to preserve capital, but at present it means gaining little or no interest. Other options, including the funds identified below, mean taking on more risk, but could ultimately lead to a higher return over the longer term.

This is not a recommendation. Any investment you choose should meet with your own personal circumstances and objectives, taking into consideration your existing portfolio.


iShares £ Ultrashort Bond UCITS ETF

This Exchange Traded Fund (ETF) aims to offer a slightly higher rate of return than cash with the added risk of holding investment grade, short dated bonds. Put more simply, it invests in loans to relatively secure companies which are close to being paid back.

The underlying investments include fixed rate bonds maturing between 0 and 1 year and floating rate bonds (where interest paid rises or falls according to interest rates) with a maturity of between 0 and 3 years.  The overall average maturity of the bonds in the ETF is 1 year at present.

The weighted average yield to maturity is 1.0% currently, and the latest 12-month distribution yield is 0.93%. Income is distributed every six months in June and December. With annual total ongoing charges of 0.09%, and a narrow average bid/offer trading spread charges are competitive.

Investing in bonds involves risk but in this fund it is considered to be low because each of the underlying bonds are issued by companies are rated as investment grade and thus relatively safe. Furthermore, given the relatively short time period until each bond is redeemed there is less likelihood of deterioration in the outlook for the company (thereby affecting its ability to service and repay its debt) affecting bonds in the portfolio compared to longer-dated ones. Shorter maturity bond prices are also less affected by changes in inflation and interest rates.


Jupiter Absolute Return

Funds in the Targeted Absolute Return sector vary considerably in terms of strategy and level of risk taken, but Jupiter Absolute Return Fund could be a genuine portfolio diversifier. 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 has developed 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 believed are potentially hindered by unhealthy balance sheets.

Shorting cetain technology stocks has been helpful for his fund’s performance of late, but overall the fund has been struggling with a higher amount of shorts than longs – meaning the fund would tend to fall when the market rises. Yet should market sentiment sour recent star performers may be the most affected – meaning weak markets could turn out to be good for this fund’s performance overall. This makes the fund potentially useful as a hedge to traditional equity funds.


Personal Assets Trust

This investment trust seeks wealth preservation in an uncertain world. Manager, Sebastian Lyon, has a reputation for navigating volatility, carefully blending a variety of assets to produce consistent returns.

This is essentially down to the Trust’s mix of assets. Mr Lyon maintains a balanced, long-term approach, allocating portions of the fund to four areas: equities, index-linked bonds, cash and gold.

This has proved a resilient combination as returns from these areas often move independently of each other rather than up and down in tandem. Over the past ten years it has lagged the FTSE All Share, its benchmark index, but has demonstrated much less volatility – although past performance is not a guide to the future.

The manager’s cautious stance inevitably leads to some unspectacular periods of performance. Indeed over the past few years it has been somewhat left behind by other investments, especially those fully invested in the stock market. However, the Trust has tended to come into its own during difficult times. This proved the case during the global financial crisis of 2007 and 2008, protecting capital well while laying the foundations for recovery.

The portfolio is currently cautiously positioned while the manager waits for a better opportunity to increase exposure to equities. They represent about a third of the portfolio and comprise stable, defensive companies such as Unilever, Coca-Cola and Nestle.


RIT Capital

RIT Capital is an investment trust in which much of the wealth of the family of Lord Jacob Rothschild is invested. Its portfolio comprises a broad range of assets with the collective aim of capital preservation. Around a core of managed equity funds and selected individual stocks, the managers add absolute return and bond strategies, as well as differentiating the portfolio through active currency management, downside protection through derivatives and investments in private companies.

Coupled with a flexible approach towards controlling the level of risk, this combination of assets results in a diversified portfolio capable of strong returns but with less volatility than the stock market – a goal that resonates with many investors. Of the four investments this has the highest exposure to equities so should be considered the highest risk, however it could be a compromise for those anxious about markets but willing to maintain a balanced approach through a diverse portfolio.


Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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