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We sat down to write this article amidst what appeared to be a roaring bull market – in fact, officially the longest running bull (upward) market in history!

At the start of the year, we could have picked virtually any decent fund focused on global equities or US equities in particular, and it would not have disappointed.

However sitting here at the tail end of October 2018, we have just seen a swift drop in stockmarket indices across the World. The FTSE 100, for example, has fallen from a recent high point of 7791 on the 9th August to a low of 6886 on the 25th October. That is an 11.6% drop – ouch!

The optimistic would say this is a buying opportunity – after a drop of roughly 10%.

best funds to invest in 2018
invest in equities

The pessimist ‘market bear’ would say this is the start of a much larger fall in markets worldwide.

So where to invest right now?

Equities (shares) are where growth is achieved for the vast majority of investors. But this is also where the risk lurks.

Is there a way to expose our hard earnt cash to the possibility of future growth but with an eye on capital preservation?  – Perhaps. Without getting into the subject of directly utilising put & call options (which we can, but that’s a subject for another day), let’s examine several areas where we can perhaps stay fully invested but without total exposure to falling (stock)markets;

1/ Absolute Return Funds

An excellent description of these types of fund can be found at Investopedia here.

In simple terms, “an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds. Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets. Absolute returns are examined separately from any other performance measures, so only gains or losses on the investment in question are considered.

absolute return funds

So these funds are unlike traditional funds, as they try to make a positive return in all market conditions – including when markets are going sideways or falling.

These funds will never rise as much as the stockmarket, instead if run efficiently they should make reasonable return in an upward market and a smaller return (or perhaps a small loss) in a downward market, the idea is to keep a low correlation to traditional ‘managed’ or ‘balanced’ funds that have a combination of equity and bond exposure.

An example of one highly rated such fund would be the 7IM Real Return Fund which has produced -0.8% over 1 year, 13.1% over 3 years and 27% over 5 years.

2/ Short dated bond funds

Interest rates have been in a falling trend in the Western World for 30 years. Whilst this trend has seen the yields on bonds ( and cash deposits) fall substantially over time, it has been good for the capital value of bonds. This 30-year trend is widely acknowledged to be at a turning point, with the US leading the way in gradually increasing its own base rate (The ECB, BOE and BOJ have yet to follow suit, but will at some point).

A 5-year bond purchased when the vase rate is say 5%, is suddenly worth much more if the base rate falls to say 3% as it is now paying more than newly issued bonds. The reverse is also true; if a bond is purchased when the BOE base rate is 0.75% (as it currently is), and the base rate rises to say 2%, the bond is now very uncompetitive if it is sold before it matures.

Short dated bond funds

Bond funds buy and sell bonds all of the time in the 2nd hand market to try and make returns from trading bonds as well as the income they receive.

The longer a bond has until it matures, the worse effect this will have on its capital value because the cash is locked up for longer.

In constructing a portfolio of defensive investments, we cannot ignore bonds, but at this point in time, it would be prudent to limit exposure to shot dated bonds (maturities of 5 years or less).

An example of a well respected short-dated bond fund would be the M&G Short Dated Corporate Bond Fund.

3/ Index Linked Bond funds

The only other type of bond fund that one should perhaps consider investing into with a cautious stance would be index-linked bonds. These types of bonds unusually pay out a variable rate of income which will rise and fall with base rates. By having exposure to these types of bond, we can be sure that the bond will keep its value if base rates do rise. We also have the comfort of knowing that the income will rise (although it may start from a lower base than other non-index-linked corporate bonds).  An example of a well-respected index-linked bond fund would be the Schroder All Mature Index Linked Bond fund.

Index Linked Bond funds
Gold related funds, ‘index trackers‘ or companies

4/ Gold related funds, ‘index trackers‘ or companies

Gold has been the ultimate store of value for a millennium. Critics of gold argue that it pays no dividend and is therefore not a true financial instrument.  However in times of financial distress gold usually hold comes into its own. Some argue that once Nixon took America off of the ‘Gold Standard’ in the early 70’s (as the Vietnam war was bankrupting them), the slow depreciation and debasement of fiat currencies started in earnest – something that has accelerated since the ‘credit crunch with quantitative easing and ultra-low interest rates for nearly a decade. 

We will not venture here into whether this currency manipulation by central banks has spawned the frenetic activity of cryptocurrencies (another subject for another day), but it is estimated that all the gold ever mined would fit into between 2 and 3 Olympic sized swimming pools, and there is a finite supply of it around the World. If we consider its $ USD value has increased from around $ 300 an ounce to its current value of $ 2200 in the last decade we can see that already represents a decent return. I the last month when markets have fallen around 10%, the spot price for Gold has actually increased, so although there are no guarantees, anyone creating a defensive portfolio may want some exposure to the ‘yellow metal’.  There are many ways to achieve exposure to gold including buying physical gold, buying into an Exchange Traded Fund (ETF) that tracks the gold price, buying units in a fund that invests into gold and gold miners, or for the more adventurous, buying shares directly in gold miners.  A good proxy according to many is the Junior Gold Miners VanEck Vectors ETF (ticker GDXJ).

Funds that contain protection

5/ Funds that contain protection

For those concerned about the prospect of a large fall in stockmarkets, there are funds which have a degree of downside protection built in. The easiest way to achieve this is to buy rolling ‘put options’ on say the FTSE 100, which effectively creates a profit if that index falls. Obviously there is a cost to regularly buy this kind of insurance, so these funds will always lag behind a traditional equity/bond fund which does not have to absorb these costs when the markets are rising, but that is perhaps a small price to pay for peace of mind, if one expects a very large fall in markets of perhaps -20% or more. A well-known example of this type of fund would be the Zurich Protected 90 Fund. This fund is structured in such a way that its unit price can never fall below 90% of its highest ever value.

6/ Funds that invest in lower risk sectors

There are many funds which are classed as ‘cautious’ or ‘defensive’. These types of funds will generally have limited exposure to equities (company shares) but will have a higher allocation in bonds (both Government and Corporate bonds that earn interest) as well as large commercial property portfolios that generate rental income. There is less emphasis on owning shares for capital growth, as shares prices can fall as well as rise. Where equities are included, they will tend to be high dividend paying sectors like utilities – as even in a recession people still need to pay their electricity, gas, water, and phone/internet bills!  An example of a fund that invests mainly in bonds & commercial property would be the Scottish Widows Cautious Growth Fund. That fund has produced 7.3% in 2014, 0.4% in 2015, 7.9% in 2016, 6.1% in 2017 and 0.3% so far in 2018 (as at end October). For those who favour low-cost tracker type funds, an ETF such as the Xtrackers Stoxx Europe 600 Utilities Swap UCITS ETF (GBP) would be a well-diversified option.

Funds that invest in lower risk sectors

We hope this brief, generic article has been of interest. If you require proper advice, please feel free to make contact with us HERE. We establish the correct level of risk for each and every new client before making any recommendations or placing any new client into any investments.

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DISCLAIMER: Nothing in this article should be construed as investment advice of any kind. The opinions here are those of the author and do not constitute advice in any way. You should not make any investment decisions based on this article and should seek Independent advice from an authorised and regulated investment adviser such as Templar European Investment Advisers.

Templar is an Independent, fee-based firm of investment advisers and is licensed to provide investment services by the Malta Financial Services Authority in all 28 EU Countries. Templar is audited annually by Mazars (Malta) Ltd.

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