Defensive Funds to Help Investors Weather Market Turbulence

Many of the most popular funds with investors are well-placed to withstand market turbulence in the wake of Brexit vote, say investment experts

Karen Kwok 24 June, 2016 | 4:47PM
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Fund investors have been increasing their holding in a number of defensive funds, in the wake of market turbulence, according to financial advisers.

Hargreaves Lansdown said BlackRock Gold & General was one of the most purchased funds today as investors looked for safe haven amid global market selloff.

Other funds on their top buy list included defensive funds: CF Train UK Equity, and CF Woodford Equity Income.

However, it appears many private investors have not been daunted by falls in the Footsie today. Hargreaves Lansdown  also found that investors were buying tracker funds  - including  Legal & General UK 100 Index, suggesting many were simply looking to increase market coverage at a lower price.

However investment experts said that private investors shouldn't be looking to alter their portfolios in the wake of UK's decision to leave the EU. Many people will hold these funds in their portfolio. This should give them some reassurance that they are good long-term holdings that are able to withstand shorter term volatility.

Darius McDermott, managing director of Chelsea Financial Services said: "Markets are likely to be volatile in a general downwards direction for a while, not helped by the fact that there are other big issues in the world that could also have an impact on share prices. This includes slower growth in China, the US election and now possible contagion in the European Union, if other countries demand their own referendums."

He added: "But the world won't end. As we know from quite recent experience markets bounce back, and good companies continue to thrive in the longer term."

So what funds should be well placed to weather the volatility forecast?

Gold-related Assets Shine amid Market Volatility

Gold’s price rallied more than 6% in early trading on Friday before pegging back slightly to $1314.39 by late afternoon. This latest rally comes on significant gains this year, with gold rising by about 25% since the start of January.

For investors who seek exposure to gold without directly holding the asset, a gold equity fund can be the alternative choice.

BlackRock Gold & General, a Gold Rated fund, is one of the best offerings available for investors seeking exposure to gold-related equities, Morningstar analyst Fatima Khizou said.

Darius McDermott, managing director of Chelsea & FundCalibre agrees, saying this fund has a very long track record that should help hedge against risks inherent in current markets.

From the start of 2002, when the fund manager, Evy Hambro became directly involved in the management of the group’s gold portfolios, until the end of February 2016, the fund has outpaced the its Morningstar sector (equity precious metals) and the FTSE Gold Miners index by 4.4 and 5.9% annualised, respectively. It has also delivered above-average performance since Hambro’s appointment as manager in April 2009, Khizou added.

So far in 2016 till February, the fund is behind the index, despite of a bumper return of 37.7%. It has been  held back by its underweighting to Barrick Gold, a mining company which performed strongly as it benefited from its high leverage to the gold price.

Investors Seek “Sweet Spots” Proving over Previous Market Cycles

CF Lindsell Train UK Equity, another Gold Rated fund which has proved successful over a number of market cycles, recorded a high number of purchases on the Brexit morning.

The fund benefits from the stewardship of a seasoned and talented UK equity manager, Nick Train, who has demonstrated a highly consistent approach, Morningstar analyst Daniel Vaughan said. 

“This fund has largely been in a “sweet spot” with respect to the manager’s strategy,” Vaughan said, adding that the consistency of the relative outperformance of this fund over the last five years is remarkable given the clear biases and risks in the portfolio.

Another trusted name, CF Woodford Equity Income, a Bronze Rated fund, run by one of the “UK’s most experienced equity-income managers” Neil Woodford, proved popular as well. Woodford’s long term track record that encompasses numerous market cycles is strong, Vaughan said.

Key stock bets accounted for the bulk of returns. In this fund, the four tobacco holdings and two mega-cap pharma stocks were among the main contributors. 

Investors Shelter in Large Cap Funds

The FTSE 100 regained much of its earlier losses to finish the day down by just 3%. This part-recovery is in part due to the failing pound, reflecting the global outlook for many of the companies listed on this stock exchange.

But the FTSE 250 mid cap index did not fare so well. At close of play it was still showing a loss of more than 7%. This index includes more domestically-focused companies.

Morningstar analyst Hortense Bioy said the L&G UK 100 Index - which aims to fully replicate the FTSE 100 Index - was a good investment proposition for investors looking to gain pure exposure to UK giant- and large-cap equities, which by definition will have more of a global outlook.

She said the fund's lack of exposure to mid-caps and small caps, coupled with the fact that it has greater exposure to defensive stocks and less exposure to cyclical stocks, meant it was should be less volatile than funds with greater weighting in smaller or UK-centric companies.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BlackRock Gold and General A Acc1,283.97 GBP0.92Rating
L&G UK 100 Index C Acc299.50 GBP-0.30Rating
LF Equity Income A Sterling Acc0.97 GBP0.00
LF Lindsell Train UK Equity Acc490.32 GBP-0.94Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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