Five doomsday funds to safeguard investors' cash

It has been all downhill for Britain's leading share index since reaching unprecedented heights just over a year ago.

Last April the FTSE 100 reached a peak of 7,104 - a record that looks unlikely to be beaten anytime soon, with the index at the start of June around 15% below the high.

Various headwinds have caused investors to adopt a "glass half-full" attitude, with concerns over the health of the global economy one of the most troubling.

The fact that it is now eight years since the financial crisis, yet economic growth remains subdued, has raised the alarm that another global recession could be on its way.

Wealth preservation

JPMorgan has a proprietary model that measures the probability of a recession occurring in America; it notes the likelihood of a recession has never been higher since the credit crunch. The firm puts the chances of a US recession in the next year at 36%.

At such times of uncertainty it is prudent add protection to your portfolio. Being diversified through a spread of different assets and building a cash buffer are two ways to achieve this. Another option is to consider funds run in an extremely cautious manner.

These "wealth preservation" funds aim to preserve capital when stockmarkets fall. The trade-off is that in rising markets these funds will lag both the stockmarket and many of their sector rivals.

But spotting these funds requires a trained eye. There are 61 funds in the Investment Association's targeted absolute return sector, which all aim to deliver positive returns in all market conditions, within a period not exceeding three years. Some funds, however, have not lived up to their billing.

To separate the wheat from the chaff, Fund Expert managing director Brian Dennehy screened all the funds in the sector, applying certain technical measures.

The first test was to achieve a "value at risk" score of less than 2.5%. As Dennehy explains, this means that in 19 months out of 20 a fund has not fallen by more than 2.5%.

Dennehy then added another filter: the fund's "maximum drawdown" over the last three years had to be less than 2%.

This measure calculates the most an investor would have lost if they bought and sold at the worst possible times. The final criterion was that the fund had to have returned 12% or more over the last three years.

After all the filters were applied just two funds had not been screened out: Henderson UK Absolute Return and Threadneedle UK Absolute Alpha.

Stand-out funds

Dennehy adds: "For ultra-cautious investors it is essential that they find a fund that will give them an acceptable level of volatility.

"These two funds stand out. Both funds invest in UK equities, either going long or short, and have no preference for either - it is simply a case of going where the opportunities emerge, and the performance of both strongly suggests they have a strategy that works."

But Michelle McGrade, chief investment officer at TD Direct Investing, argues another targeted absolute return fund is also worthy of being described as a wealth preservation fund - Newton Real Return.

Iain Stewart, the fund manager, is pessimistic about the outlook for financial markets. He holds 45% of the portfolio in equities and 40% in bonds, mainly high quality.

The remaining 15% is held in gold and cash. Stewart holds the view that stockmarkets have been driven higher by quantitative easing, and is positioning to take advantage of a market correction.

McGrade says: "We view him as an experienced and credible manager. The fund has a flexible remit, able to invest across many asset classes, with both derivative and hedging strategies used with the aim of reducing risk and delivering positive returns."

Outside of the targeted absolute return sector Gavin Haynes, investment director at Whitechurch Securities, picks out Jupiter Distribution as a defensively managed fund positioned to weather stockmarket storms.

"The fund, managed by Alastair Gunn and Rhys Petheram since July 2010, aims for a steady total return by providing a sustainable income above cash and modest long-term growth," says Haynes.

"The fund invests around 65% in a mix of fixed interest securities managed by Petheram. The remaining 35% of the portfolio is invested in mainly UK-yielding equities and is managed by Gunn."

For cautious investors seeking a bond fund, Square Mile research analyst Amaya Assan picks Axa Sterling Credit Short Duration Bond as her preferred choice.

"This is a relatively simple corporate bond fund which invests in short-dated bonds that produce an income, but with less volatility than the market," says Assan.

"About 20% of the portfolio matures each year, which gives some protection against any future rises in interest rates, as the manager should be able to re-invest maturing bonds at higher yields.

"It may be attractive to investors who are sensitive to the capital volatility of their investments and wish to preserve capital over the longer term, but who still require some level of income."

This article was originally published by our sister magazineMoney Observer here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser