Portfolio picks 

Two funds to offer protection in a falling market

The list of factors that could mean that October was the beginning of a bear market is a lot longer. We have US President Donald Trump versus China and the imposition of tariffs and a continuing trade war.

Then there is Brexit, Italy facing down the EU, the rise of populism politics around the world and all the uncertainty that that creates.

Then, of course, we have the ending of one of the biggest financial experiments the world has ever seen. Quantitative easing (QE) is slowly turning into quantitative tightening (QT), with only the Bank of Japan being the last one going. Some irony, since they were the ones that started it.

Whatever your view, it seems likely that markets will be volatile in the future.

Fixed interest markets no longer look the safe haven that they have been since central banks got inflation under control in the 1980s.

We had one fixed interest fund manager tell us he would rather buy equities then corporate debt. Maybe that’s not surprising, since in Europe 73 per cent of equities yield more than their corporate debt.

One investment style that has been out of favour since the global financial crisis has been value investing. One of the things that we have been hearing from equity fund managers of varying styles is that they are now finding individual shares representing excellent value.

The good thing about holding a share that is cheap now is that it has less far to fall if markets do maintain a downward trend. Additionally, you have the consolation of an income stream.

Two funds we have tucked away in our portfolios are the Schroder Income Maximiser and the RWC Enhanced Income fund.

The Schroder fund has the underlying portfolio of the Schroder Income fund, managed by Kevin Murphy, Nick Kirrage and the value team.

The RWC fund is managed by John Teahan, Ian Lance and Nick Purves, all three of whom were previously at Schroders.

These funds enhance the underlying dividend yield by selling call options for which they get a paid premium.

Both of these funds will participate in a rising market, although not to the full extent if the market is rising rapidly and the call options are called.

In a flat market they will benefit as the calls will lapse, and in a falling market these funds offer some protection.

Paul Warner is head of portfolio management at Miton Optimal

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