When it’s time to take stock: funds that provide a cushion in falling markets

Stock market volatility in 2017 was extremely low. The US and UK stock markets in particular crept higher most days and, more than eight years into a bull market, investors could be forgiven for thinking that they only went in one direction: up.

While more seasoned investors know this is not the norm, human psychology is such that we base our current thinking on the most recent events, so it is easy for people to get complacent at times when markets are steadily rising.

However, every investor should know that their capital is at risk and that whatever goes up can come down. Investors received a timely reminder of this in February 2018, when the US stock market fell by almost 5% overnight with European and Asian markets following soon after.

While the stock markets bounced back in the short term, it served as a useful wake-up call for investors to make sure their portfolios are in a fit state to withstand such an event and provide some form of cushion to lessen the impact of a larger fall.

Four funds providing a cushion in falling markets

Elite Rated funds that should fall substantially less than the UK stock market in a correctional phase include BlackRock UK Absolute Alpha, Brooks MacDonald Defensive Capital, Church House Tenax Absolute Return Strategies and Premier Defensive Growth.

1. BlackRock UK Absolute Alpha

This fund aims to achieve a positive absolute return for investors regardless of market conditions. It is a UK equity long/short fund, investing in UK businesses of all shapes and sizes. The manager will use contracts for differences (CFDs) to secure short positions, aiming to make money when share prices fall as well as rise. It is a very useful portfolio diversifier, with much lower volatility than the UK equity sector average. The manager has a pragmatic approach to stock selection, taking the macroeconomic environment into account as well as looking at each individual company’s fundamentals. This fund has a performance fee of 0.2%.

2. Brooks MacDonald Defensive Capital

While the types of assets that this fund holds can be a bit complicated—convertible bonds, preference shares, structured notes, bond and loan assets, and discounted assets—the goal of delivering positive total returns even when the market falls is straightforward enough. The managers seek to create a portfolio with predictable performance, by investing in assets that have fixed returns. They keep a close eye on the portfolio mix and won’t hesitate to sell one of their holdings if its yield drops unacceptably or if it seems likely to move in tandem with falling markets. There is no performance fee on this fund.

3. Church House Tenax Absolute Return Strategies

This is a multi-asset fund, which invests directly in assets, rather than using the fund of fund route. Positive returns have been achieved in 97% of rolling 12-month periods over the past five years, with an average return of 5.5% and volatility of just 27% of that of the FTSE All Share index. James and Jeremy first form a macroeconomic view based on data, corporate activity, political risk, and the interest rate and inflation outlook. They then seek to gain an appropriate exposure across a broad range of asset classes. They believe the only risk that matters is the risk of an investment falling in value and manage the fund accordingly.

4. Premier Defensive Growth

This fund seeks to deliver a consistent positive return in all market conditions by investing in a portfolio of assets that offer a predictable return over rolling three-year periods. The strategy has been thoroughly tested in a wide range of scenarios and has continued to deliver. The manager’s strategy and temperament are well-suited to delivering low-risk positive returns; cautious investors may like the defensive nature of this fund and the fact that it is not expected to participate in very large market falls (or large market rises). This fund does not have a performance fee.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.