Investors worried about a double-dip recession may be looking for some security. It is impossible to bomb-proof your portfolio if you want growth as well, but managing a defensive, cautious multi-asset fund we have clearly had to give some thought to this challenge.
Diversification is a key risk defence, but you have to understand what you are diversifying with. In 2008, the crisis sent correlations close to one for many asset classes and diversification did not provide protection for many. Holding something just for the sake of diversification is senseless – if we do not like an asset, we will not buy it.
The big short-term fear is deflation but, in our view, the biggest long-term threat is inflation. This has opened up an opportunity to build some long-term inflation protection into portfolios while it is cheap. Index-linked bonds are the most obvious protection but we feel that gold could do even better this time. We first bought gold at below $1,000 and it is now around $1,300 and could still go significantly higher. Of course, gold does not offer income but with interest rates so low, the opportunity cost of holding gold is low at the moment.
Equities may be volatile but they do offer income and the value should not be underestimated. We are keen on global leaders at the moment. These are companies that are leaders in their sectors and have seen their competition reduced by the credit crunch. Inability to find credit, failure to refinance and falling turnover have hindered a lot of companies. That has made strong firms even stronger in relative terms. That also means they are in a better position to increase their prices if inflation becomes serious. We particularly like companies that have a global exposure and trade within emerging markets.
You might argue that there are currently few investment bargains around. The old saying “if you do not know what to do, do nothing” often proves sound advice in such scenarios. Preserving cash for when obvious opportunities become available is wise and in the meantime, you know it is safe.
This is the most important strategy for the years ahead. In developed markets, the low-growth era is here for some time to come and markets are more volatile. Threats and opportunities can come from nowhere and you need to be able to respond quickly. This is where fund of funds really prove their worth to investors and their advisers.
A fund of funds manager delivers expert fund selection, sensible diversification, asset allocation and, most important, constant management.
By recommending a defensive multi-asset fund of funds, you know you will not be the only one shepherding your clients’ savings into the investment bunker when the next air raid siren sounds.
Elliot Farley is the manager of the T Bailey defensive cautious managed fund