A fund that can limit downside can be helpful in many balanced portfolios in all market environments. And with a very uncertain environment, for reasons including the coronavirus pandemic and how long it will go on, and an unclear future for the UK due to its departure from the European Union, limiting downside is more important than ever. Multi-asset funds that look to reduce volatility and protect against market falls are an option, as are absolute-return funds that aim to deliver positive returns.
NEW ENTRANT: Ninety One Diversified Income (GB00B7700K18)
Rob Morgan at Charles Stanley and Jason Hollands at Tilney suggested adding Ninety One Diversified Diversified Income. This fund aims to provide income with the opportunity for capital growth over at least five year periods. It does this by investing in a variety of assets that its managers think will provide a reliable level of income in many market conditions.
Most of the fund's assets are in bonds, and it can invest in many types of these in any currency. It also invests in equities, derivatives, listed property securities, alternative assets and funds. It does not invest in property or commodities directly.
At the end of July, the fund had 20.4 per cent of its assets in investment grade corporate bonds, 18.7 per cent in emerging markets local currency debt, 12.8 per cent in developed markets sovereign bonds and 9 per cent in high yield corporate bonds. Equities accounted for 29.1 per cent of its assets.
The fund’s managers also use derivatives to manage risk and reduce costs.
The fund has proved its worth as a defensive holding, making a positive return in each of the past 10 calendar years and over the first eight months of this year. This includes down years such as 2018 and 2011, when broad equity indices such as the MSCI World and FTSE All-Share made negative returns. It also does better in those years than the Investment Association (IA) Targeted Absolute Return fund sector average which in both cases was negative.
“Ninety One Diversified Diversified Income sits in the IA Mixed Investment 0-35% shares category but offers many of the attributes of an absolute return structure, historically offering lower volatility and an attractive income,” comment analysts at Tilney. “This product has the advantage of structural simplicity and competitive pricing, led and supported by a well-resourced and dedicated multi-asset team. The managers can also draw on the broader specialist capabilities at Ninety One in global/regional equity, sovereigns, credit and emerging market debt.”
In early September the fund had an attractive 12 month yield of 4.07 per cent.
The fund’s co-manager John Stopford is head of multi-asset income at Ninety One and has 30 years investment experience, particularly in bonds. He has run this fund since 2012. Co-manager Jason Borbora-Sheen has worked on this fund since February 2019 and is co-portfolio manager of Ninety One’s multi-asset income strategies alongside Mr Stopford. Mr Borbora-Sheen’s research responsibilities include equities and he has nine years investment experience.
Capital Gearing Trust (GCT)
Capital Gearing Trust does exactly what wealth preservation funds should do, having made positive net asset value (NAV) returns for the past 10 calendar years and positive share price returns in all but one. The fund delivers a different pattern of returns to equity markets and can make positive returns when the latter are falling. It has proved its worth during this year’s market volatility, delivering NAV and share price total returns of 2.31 per cent and 2.46 per cent over the first seven months of this year, over which period the FTSE All-Share index fell 20.47 per cent.
The trust aims for capital growth in absolute terms rather than relative to a particular stock market index, and preserving shareholders’ wealth is an important consideration. Capital Gearing Trust also has a discount control policy whereby it uses share buybacks or issues in normal market conditions to try to make its shares trade as close as possible to NAV. This has proved successful and the trust typically trades at a slight premium to NAV.
Capital Gearing Trust invests directly in assets such as index-linked government bonds, which accounted for 27 per cent of its assets at the end of June, and gets a lot of its exposure to other assets via funds.
The trust can also use derivatives such as warrants, options, swaps and forward contracts. It has a highly experienced investment team, with co-manager Peter Spiller having run it since 1982. Its ongoing charge of 0.7 per cent is reasonable, especially considering how well it has delivered on its aims.
Personal Assets Trust (PNL)
Personal Assets Trust has made positive NAV and share price returns in eight out of the past 10 years, in line with its aim of protecting and increasing the value of its shareholders’ funds over the long term. It proved its worth during this year’s turbulence, with NAV and share price total returns of 6.07 per cent and 5.73 per cent, respectively, over the first seven months of this year, over which period the FTSE All-Share index fell 20.47 per cent.
The trust tries to keep its shares trading at a price close to its NAV via share buybacks and issues, and typically trades at a small premium to NAV.
It invests in a range of different assets and at the end of July had 43.6 of its assets in equities, 30.4 per cent in US government inflation-protected bonds, 11.1 per cent in UK government bonds and 9.9 per cent in gold bullion.
“Personal Assets Trust has delivered an impressive long-term performance record, with low volatility,” comment analysts at Winterflood. “The fund’s exposure to US TIPS and gold has assisted performance, but what really stands out is manager [Sebastian Lyon’s] willingness to invest in high-quality growth companies. While being wary of the valuation levels for equities, this has not led to a desire to hide in defensives, which reflects his focus on fundamentals. It remains a highly attractive vehicle for investors that share its long-term, absolute return mindset.”
RIT Capital Partners (RCP)
RIT Capital Partners is a multi-asset investment trust that aims for long-term capital growth while preserving shareholders’ capital. It invests in quoted and unquoted assets such as hedge funds, which private investors could not necessarily access directly, and has varied geographic exposure.
It has been largely successful in its aims, having made positive NAV returns in nine out of the past 10 calendar years. Over the first seven months of the year the trust’s NAV total return was down 2.04 per cent, slightly more than FTSE World index’s fall of 0.63 per cent, but far less than the FTSE All-Share’s fall of 20.47 per cent. The trust’s share price was down 17.62 per cent at the end of July, taking it to an unusually wide discount to NAV of 11.4 per cent. The trust often trades at a premium to NAV, so when it is at such levels it could be a good opportunity to buy its shares.
The trust’s managers said in August that they are retaining their cautious portfolio stance “with moderate quoted equity exposure complemented by other diversified and often uncorrelated sources of return. This has been a feature of our approach over many years, and one which has produced equity-type returns with less risk”.
Analysts at Numis Securities say: “RIT Capital has an exceptional long-term track record through an unconstrained investment approach seeking to deliver long-term capital growth, while preserving shareholders’ capital. Since inception in 1988, it has delivered an attractive return profile, participating in 72 per cent of market upside but only 38 per cent of market declines. This has resulted in the NAV total return compounding at 11.1 per cent a year, significantly ahead of the MSCI AC World and FTSE All-Share indices, which have delivered annualised Sterling total returns of 8.5 per cent and 7.8 per cent, respectively. [The trust’s managers] seek attractive opportunities across a range of asset classes, leveraging off an extensive global network of contacts, investing alongside managers with specialist industry and country expertise. The NAV continues to behave in the fashion investors have come to expect from RIT Capital, providing some insulation from falling markets, whilst participating in the upside.”
Janus Henderson UK Absolute Return (GB00B5KKCX12)
Janus Henderson UK Absolute Return has made a positive return in nearly every full calendar year since its launch in 2009. And its fall of 2.71 per cent in 2018 was less than the FTSE All-Share index’s fall of 9.47 per cent and MSCI World index’s 3.04 per cent fall. The fund has also proved its worth amid the recent volatility: between the start of the year and early August it made a total return of 2.25 per cent, over which time the FTSE All-Share was down 18.83 per cent and the MSCI World index returned 1.21 per cent.
Janus Henderson UK Absolute Return aims to provide a return greater than zero, regardless of market conditions, over any 12-month period. It seeks to outperform the UK base interest rate, after charges, over any three-year period.
The fund makes extensive use of derivatives to take long positions in shares its managers think will rise and short positions in shares they think will fall.
Typically, at least 60 per cent of the exposure to long and short positions is to UK companies – of any size, in any industry. Up to 40 per cent of the long and short exposure may be to non-UK companies.
Its managers, Ben Wallace and Luke Newman, can also hold a significant proportion of its assets in cash and money market instruments, as a result of holding derivatives and to take a defensive stance. They can also employ leverage to invest a greater amount than the fund’s value.
A downside to this fund is its performance fee of 20 per cent of any returns it makes over the UK base interest rate. This can take its basic ongoing charge higher. For example, in the fund’s financial year to 31 May 2018 the ongoing charge of 1.05 per cent plus the performance fee of 0.33 per cent added up to 1.38 per cent, for this share class. But if it does not meet its target this will not be triggered – as was the case in its last financial year. And investors are compensated for it through performance in years when it is.
BNY Mellon Real Return (GB00BSPPWT88)
BNY Mellon Real Return aims for a total return of at least one-month Libor (cash) plus 4 per cent a year over five-year periods, and a positive return on a three-year rolling basis. It has made positive returns in nine out of the past 10 calendar years, while between the start of this year and early August it made a positive return of 1.25 per cent, over which time the FTSE All-Share index fell 18.83 per cent.
The fund has also made good cumulative total returns relative to the FTSE All-Share index and IA Targeted Absolute Return fund sector average.
Much of this defensive performance was achieved under former lead manager Iain Stewart who stepped back from its day-to-day management at the end of June 2018. However, BNY Mellon funds tend to be run by teams well supported by many analysts rather than individual managers, via the company’s thematic approach. And BNY Mellon said that there would be no change to the fundamental principles on which the management of the fund is based.
The current managers are also very experienced and include Suzanne Hutchins, who has led BNY Mellon’s real return team since the start of 2018, had already worked on this and similar funds, and worked with Mr Stewart for many years.
The fund invests in a diverse range of assets, typically including a core of return-seeking assets such as equities, alongside positions that offset risk by dampening volatility and preserving capital.
“This is a broad multi-asset portfolio with an unconstrained and flexible approach, a combination that is crucial to delivering an attractive real return in an increasingly volatile world,” says Rob Morgan, pensions and investments analyst at Charles Stanley. “The fund’s greatest attraction is how it generates its long-term performance record – it has protected capital well during volatile periods.”
SVS Church House Tenax Absolute Return Strategies (GB00BNBNRF27)
SVS Church House Tenax Absolute Return Strategies is a multi-asset fund that aims to make returns greater than cash over rolling 12-month periods with low volatility. Capital preservation is also a key aim.
The fund has made positive returns in eight out of the past 10 full calendar years, and between the start of this year and early August was flat, over which period the FTSE All-Share index fell 18.83 per cent. Its cumulative returns beat the IA Targeted Absolute Return fund sector average over one, three, five and 10 years – by quite some margin over the longer periods – and has largely done better than the FTSE All-Share. It has also outperformed these benchmarks over the past six months.
The fund invests in assets including various types of bonds, infrastructure and equities.
“This is an extremely useful portfolio diversifier,” comment analysts at FundCalibre. “The fund is one of the few in the sector that targets an absolute return from diversification and risk management alone. It does not short sell any securities or indices, and does not have a performance fee.”
|Fund/benchmark||1-year total return (%)||3-year cumulative total return (%)||5-year cumulative total return (%)||Ongoing charge plus any performance fee (%)|
|Capital Gearing Trust share price||3.3||14.5||40.00||0.7*|
|Personal Assets Trust share price||6.4||14.3||41.3||0.86*|
|RIT Capital Partners share price||0.9||12.3||40.2||0.68*|
|Janus Henderson UK Absolute Return||4.2||5.3||12.9||1.05|
|BNY Mellon Real Return||3.7||14.9||23.4||0.70|
|SVS Church House Tenax Absolute Return Strategies||1.8||3.2||15.2||0.77|
|Ninety One Diversified Income||2.9||8.0||20.5||0.75|
|FTSE All Share index||(12.6)||(8.2)||17.3|
|MSCI AC World index||6.0||24.6||86.8|
Source: Morningstar, *AIC.
Performance data as at 31 August 2020.
**Data shown is for a different share class to the one indicated in the text
For all our selections across various sectors, see below: