Funds offering exposure to gold, infrastructure and high-quality corporate bonds could be potential ways for investors to strengthen their portfolios against a looming recession, according to The Share Centre analysts.
Over recent weeks, markets have endured heavy falls as investors worry about the continuing spread of the coronavirus pandemic and the effect that it will have on the global economy. With several countries closing off large parts of their economy, many now believe that a global recession is on the cards.
Despite the fact that many asset classes have been caught up in the selling, The Share Centre reminded investors that it is important to maintain a diversified portfolio that spread risk by giving exposure to a range of assets.
Source: The Share Centre, Bloomberg 2 Feb 2008 to 30 December 2009
Joe Healey, investment research analyst at The Share Centre, said: “At times like these, secure assets with low correlation to markets can be good alternative investments during market downturns. Examples include gold, infrastructure and high-quality bonds.
“Using the 2008 financial crisis as an example, the graph shows the relationship of alternative assets compared to the UK equity market and highlights the benefits they may offer during the hard times.
“During the two-year period (start of 2008 to the end of 2009) these assets actually provided a return to investors despite the FTSE 100 declining over the period, showing clear benefits to the inclusion in portfolios at that time, although it’s important to remember past performance is no guide to future performance.
“The reason for this is these assets tend to be recognised as relatively secure while providing good diversification of risk and are supported by lower volatility levels than the equity market.”
Below, The Share Centre picks three funds that could be good options for investors seeking to add resilience to their portfolio.
Gold – The Royal Mint Physical Gold ETC
The first defensive asset highlighted by Healey is gold, which is seen as a classic ‘safe haven’ in times of market stress. Since the start of 2020, the yellow metal has gained around 5.14 per cent while the MSCI World index has fallen by 21.84 per cent.
Performance of gold vs global equities in 2020
Source: FE Analytics
“Gold has historically been a secure store of wealth helping investors navigate through difficult times. Being a finite resource, gold has intrinsic value which draws investors in when they require a flight to safety,” the analyst said.
“For investors looking to access gold, Royal Mint Physical Gold is designed to track the spot price of physical gold at a cost of 22 basis points, the lowest among the gold ETCs [exchange-traded commodities] in the market. It is 100 per cent backed by LBMA gold bars held on the segregated basis by the Royal Mint in Wales and investors could redeem for gold bullion, LBMA bars and coins if they wish.”
Infrastructure – First State Global Listed Infrastructure
Next up is infrastructure, with Healey choosing Peter Meany and Andrew Greenup’s £1.6bn First State Global Listed Infrastructure fund as his preferred way of taking exposure to this asset class.
Since the start of 2020, the fund has fallen 19.93 per cent – compared with a 17.79 per cent drop from its average IA Global peer and a 21.84 per cent drop in the MSCI World index. It must be kept in mind that this is a short period to review performance and one marked by heavy falls.
Performance of fund vs sector and indices in 2020
Source: FE Analytics
“Infrastructure is another great way to diversify portfolios tending to have lower correlation to other asset classes. During market downturns, this may be a way to shelter portfolios and even possibly benefit from upside potential,” The Share Centre analyst said.
“A solid selection for investors looking to gain exposure to infrastructure is through the First State Global Listed Infrastructure fund which focuses on the companies that can self-fund the expansion of their asset base, generate stable revenue and pay a growing dividend. The portfolio mixes its defensive and growth holdings according to the economic or business cycle and is mainly invested in the developed markets.”
First State Global Listed Infrastructure has an ongoing charges figure (OCF) of 0.78 per cent and is yielding 3.43 per cent.
Investment grade corporate bonds – Rathbone Ethical Bond
Healey’s final resilient fund pick is Rathbone Ethical Bond, which is managed by Bryn Jones and resides in the IA Sterling Corporate Bond sector.
The £1.6bn fund is in its peer group’s top quartile over the past three, five and 10 years, although it has fallen into the bottom quartile over the year to date.
Performance of fund vs sector and index in 2020
Source: FE Analytics
“Investment-grade corporate bonds are considered to be some of the more secure bond assets in the market tending to associate with established and relatively stable companies. In order to become investment-grade standard, ratings agencies must deem the company to be reliable signifying a lower likelihood of default risk,” the analyst said.
“The Rathbone Ethical Bond fund is best performing on risk-adjusted terms in its sector group across a five-year period and also benefits from an ethical overlay, screening out ‘sin stocks’ ensuring all companies are benefiting society in some way or another.
“This is a strong fund investors can feel comfortable with regarding its ethical roots.”
Rathbone Ethical Bond has a 0.66 per cent OCF and yields 3.40 per cent.