Stockmarket sell-offs might be a natural part of investing, but portfolios have at least been able to cushion the blow with safe-haven assets. It’s a role government bonds have performed admirably well in the biggest sell-offs of recent memory, from the short-lived market crash of early 2020 to the volatile final quarter of 2018.
But recent developments look worrying for traditional balanced portfolios. When most equity markets fell last month, developed market government bonds also struggled, with yields (that move inversely to prices) on the rise. With the prospect of stubborn inflation and even interest rate rises posing a major threat for fixed income, investors are once again asking if any reliable safe havens remain. Some other mainstays have also faltered: gold has struggled both in September and more generally this year.
Other than using cash, diversification is often a case of holding many different assets in the hope that something works when needed, and that may well be a good strategy for now. But an assessment of returns from September may help to show which funds are showing resilience.
While this offers just one snapshot in time, we have looked across open and closed-ended fund sectors associated with more defensive portfolios to see which names fared well as government bonds and equities fell in September, while also asking which might show further resilience.
What has worked?
With inflation concerns and surging gas prices causing trouble for the likes of bonds, some trusts operating in asset classes with a link to inflation were among the stronger performers. Infrastructure stalwart BBGI Global Infrastructure (BBGI) was one of the few names to register a positive total return for shareholders, as were renewables names NextEnergy Solar (NESF), Gresham House Energy Storage (GRID) and Aquila Energy Efficiency (AEET). Some property names also stood out, with modest positive returns for Standard Life Investments Property Income (SLI) and Regional REIT (RGL).
It should be noted that a good number of infrastructure and property trusts did see their share prices caught up in the September sell-off, as is often the case for closed-ended funds at moments of volatility. But with the sell-off proving relatively limited, no obvious bargains had emerged as September ended. Infrastructure trust shares have continued to trade at big premiums to portfolio net asset value (NAV), though some of these premiums have narrowed somewhat.
In the renewable energy infrastructure space, Aquila European Renewables Income (AERI) and Foresight Solar Fund (FSFL) traded on premiums that were notably tighter than their 12-month average, as of 4 October. This may well reflect idiosyncratic issues: both released half-year results in September, and both trusts reported power generation levels below their original forecasts, even though portfolio NAV returns were positive for the relevant period.
Elsewhere, a number of star performers from the pandemic held up well in the month. Private equity trusts including Apax Global Alpha (APAX), Pantheon International (PIN), Princess Private Equity (PEY), ICG Enterprise Trust (ICGT) and Oakley Capital Investments (OCI) all delivered positive share price total returns, continuing a phase of exceptional performance. With many of the trusts in this sector continuing to trade on big discounts, the sector remains compelling.
With mainstream assets struggling, investors may wish to consider more esoteric funds to provide them with returns that have less correlation to stocks and bonds. Some of the better performers from last month might support that argument: a number of credit investment trusts, in particular, have held up well, including Honeycomb Investment Trust (HONY), Riverstone Credit Opportunities Income (RCOI), BioPharma Credit (BPCR) and CVC Credit Partners European Opportunities (CCPG).
These trusts can take very specific approaches: Honeycomb provides finance for the non-bank lending sector with a focus on areas such as real estate and lending to small and medium enterprises (SMEs) and consumers. The Riverstone trusts focuses on loans to small and middle market companies operating in areas such as renewable energy infrastructure. BioPharma Credit, which we highlighted in April 2020 in Alternative investment trusts for the dividend drought, invests in debt secured against cash flows derived from the sale of approved life sciences products.
Funds such as these tend to stand out because of their attractive level of yield, but some may also fare well if interest rate rises emerge in the near future. CVC Credit Partners European Opportunities is predominantly exposed to floating rate notes, which can move in line with a given benchmark and at least partially offset the effect of threats like rising rates. Other names may also have a defensive element here: Stifel analysts recently noted that asset-backed securities fund TwentyFour Income (TFIF) holds securities with floating rates, while GCP Asset Backed Income (GABI) recently had 45 per cent of its NAV in inflation or interest rate-protected investments.
For some other alternative assets, time will tell. We have previously noted that music royalties funds are growing in stature, and Round Hill Music Royality (RHM) had a good September in terms of performance. Yet investors may wish to be cautious here – if music royalties lack an obvious correlation to mainstream assets, it remains to be seen how they will perform in different market conditions.
Wealth preservation
A handful of absolute return funds have also managed to get through the simultaneous equity and bond sell-off with positive performance. That said, many of these are not readily available to retail investors. We would also tend to suggest caution when it comes to absolute return funds, given that many have an underwhelming track record, and their success can sometimes rely on fairly specific scenarios playing out. Janus Henderson Absolute Return (GB00B5KKCX12), the one absolute return name in 2021’s IC Top 50 Funds list, is slightly down for September though less than global equity markets.
On a related note, wealth preservation investment trusts could form part of an investor’s arsenal, though it is worth monitoring what exactly they hold. Ruffer Investment Company (RICA), Personal Assets (PNL) and Capital Gearing (CGT) all have a chunk of equity exposure with the balance mainly spread across conventional safe haven assets, from gold and gold mining shares to different forms of fixed income, including index-linked bonds. Investors tend to disagree about the effectiveness of such assets in periods of inflation and rising rates. Some disagree on whether gold genuinely works as a hedge against inflation, while inflation-linked bonds can perform well at times of growing inflation expectations, but struggle if interest rates go up due to their high levels of duration. Ruffer Investment Company had a flat September while the other two names mentioned struggled slightly.
