This year began exactly where 2016 left off, with extreme nervousness. Donald Trump’s election to The White House sent investors into a spin and, despite a rally in the US stockmarket, political and economic commentators remain pessimistic.
A glance at Twitter highlights the scale of disaster the liberal elite warn lurks around every corner. These predictions of Armageddon may well come to fruition at some stage. However, with vast swathes of investors’ capital in cash on the sidelines, I am not sure a prolonged market fall is on the cards just yet.
Investors who disagree with this view will wish their portfolio to remain defensive in nature. But cash is not the only option. Total return funds typically place greater emphasis on sheltering their portfolio from losses than participating in a market rally, although they hope to catch some of the upside.
One such fund is Pyrford Global Total Return. Pyrford was established in 1987 with an aim to generate a real rate of return with low volatility. The business was acquired by the Bank of Montreal in 2007 but its unconstrained, benchmark-agnostic approach remains intact.
The team at Pyrford is cautious and the portfolio is as defensive as it has ever been. It typically invests into the shares of high-quality companies, government bonds and cash. While the managers expect shares will perform well over the long term, they will invest in government bonds and cash when they feel share prices are too high.
The team uses the FTSE All Share index yield as a measure of value to trigger a discussion on whether to increase or decrease equity exposure. This prompted them to increase equity exposure from 30 to 35 per cent in early 2016, for example. Global stockmarkets subsequently rebounded and they took profits from this portion in mid-2016 and reduced exposure back to 30 per cent.
Despite tweaks to the portfolio’s equity weight as and when they find value, Pyrford does not make short-term trades. Nestlé, for example, has featured for 27 years, as the team values the company’s strong brand. It is also positive on a number of innovative pharmaceutical companies with good research and development pipelines.
Geographically, they favour Asia for its reasonable valuations, good demographics, high savings rates and productivity, along with manageable debt levels. That said, they feel China more specifically is an increasing concern and view Europe as a catalogue of problems.
The fund performed well in 2016. Sterling’s weakness against most major global currencies proved a significant tailwind and boosted returns from its overseas investments. The team sees greater value in the pound following its period of weakness and have increased exposure to sterling-denominated assets, such as UK government bonds, and reduced exposure to US government bonds. All in all, however, the team is generally downbeat on the prospects for bonds so the fixed interest portion of the fund is focused on short-dated bonds, which are less sensitive to rising interest rates.
Pyrford’s views will strike a chord with pessimistic investors. For example, they feel this is the weakest US recovery since World War Two, quantitative easing is not working and there is too much debt globally. The team is also unimpressed with Trump’s infrastructure initiative and believe it will have little impact unless it results in increased productivity.
Finally, they view any potential rise in interest rates as a major problem, too. Even a small rise is likely to have a rapid knock-on effect on mortgage interest rate costs, for example. This puts the Bank of England in a difficult position and it will struggle to get out from between a rock and hard place.
The Pyrford team invests with all these views in mind, seeking to avoid the pitfalls stockmarkets might encounter as a result. The fund returned 9.3 per cent last year, which comfortably outpaced the UK CPI rise of 1.1 per cent. Should markets take a tumble, this fund should shelter investors from the worst of the fall.
Mark Dampier is head of research at Hargreaves Lansdown