With no low-risk options outside cash at the moment, investors looking for returns ahead of inflation have been forced to consider riskier assets – one reason perhaps why stockmarkets have been forging ahead.
Certainly, equities do not offer the value they did a couple of years ago and, like bonds, they may be subject to greater volatility when quantitative easing is pared back. So for investors wishing to diversify or lower the volatility of their portfolios, or who simply want to build a defensive core for the long term, here are some defensive funds to consider.
Old Mutual Global Strategic Bond
This highly unusual fund’s aim is primarily to beat returns on cash and inflation while sheltering capital. The manager, Stewart Cowley, has the full spectrum of the bond market, currencies and derivatives at his disposal. At present the fund is positioned for sustained inflation. Index-linked UK and US government bonds represent around half of the portfolio, and there is some exposure to corporate bonds. Mr Cowley is poised to short UK gilts and US Treasuries when he believes the moment is right – something conventional bond funds are unable to do.
Personal Assets Trust
Manager Sebastian Lyon believes we are in an era of “reluctant speculation”. As investors scramble for income and returns that outstrip inflation, prices and risks are driven higher. The portfolio is invested conservatively in its “four pillars” – blue chip equities, index-linked bonds, gold and cash – with the aim of producing steady returns and damping volatility.
Invesco Perpetual UK Strategic Income
Equity income funds target companies that are highly profitable and provide high and growing dividends. This income, if not required, can be reinvested to produce compound growth. Equity income should form the core of most investors’ portfolios, whether they are looking for income or growth. Invesco Perpetual Strategic Income fund is positioned cautiously, as manager Mark Barnett believes only a select number of companies have the ability to grow revenues, profits and dividends in a low-growth world.
CF Miton Strategic Portfolio
Martin Gray, manager of the CF Miton Strategic Portfolio, believes the world’s economic ills have been pushed to one side, and at some point anaemic growth and stagnant corporate earnings will come back into focus. He warns this is not a time for being brave and has only around 30 per cent invested in equities. It means the fund’s performance has been pedestrian in the past couple of years, but Mr Gray has increased exposure to riskier assets successfully in the past, so it should be seen as an opportunistic fund that may take on more risk in the future.
Rob Morgan is Pension and Investment Analyst at Charles Stanley Direct.