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Weather the storm. Which defensive funds do advisers recommend?

By Mike Narouei, Content Producer at Boring Money

22 Nov, 2018

Winter is setting in and investors are feeling the chill. With stock markets bouncing around after every Donald Trump tweet or Theresa May press conference, some nervous investors want to take a more defensive approach. So which funds are best to insulate portfolios against the inclement weather and minimise the risk of losing out?

Bond funds used to be the place to go for portfolio protection, but this isn’t necessarily true anymore. Bonds look very expensive and tend to do badly when interest rates are rising (as they are today). The same goes for very defensive stock market investments such as the consumer giants or tobacco stocks. These stable, dependable companies have become very expensive and may not prove as ‘all-weather’ in future.

That said, savings accounts still pay almost nothing, even though UK interest rates have moved a little higher this year. There’s also the problem that it is difficult to predict when markets might pick up again, so it may be better to stay invested than try to time entry and exit from the market.

With this in mind, here are some top fund picks from our favourite advisers. These should be resilient through tough times, helping you keep some skin in the game without all the associated worry. But as ever, keep in mind there’s no such thing as a guaranteed win.

Our favourite advisers’ favourite defensive funds

Patrick Connelly, Chase de Vere

Investec Cautious Managed – This is a multi-asset fund (i.e. it invests across bonds, shares and other assets). It benefits from an experienced manager who typically invests 50% in assets such as shares which he expects to grow, and 50% in assets such as government bonds and cash to provide protection. He adopts a contrarian approach, by making long-term investments in cheap, out-of-favour companies.

Trojan Income – This fund adopts an absolute return approach*, investing in UK equity income stocks and aiming to manage risks and produce consistent returns. The fund has under-performed when stock markets have performed well, but it has an excellent longer-term record and the defensive stance adopted by the manager should stand investors in good stead if markets remain volatile. It has a current yield of 4.1%.

*in layman’s terms an ‘absolute return approach’ means a fund that invests to beat cash, rather than to beat a stock market benchmark such as the FTSE 100.

Juliet Schooling Latter, Chelsea Financial Services

Gravis UK Infrastructure Income – In more specialist areas we like trusts investing in student accommodation, social care homes and infrastructure, which are all sectors less dependent on the economic cycle to thrive – they are structural growth areas. We also like some trusts investing in wind and solar farms.

Royal London Global Short Duration High Yield – We prefer short-duration funds: those that invest in bonds which are due to mature sooner rather than later. This means that if conditions deteriorate, these bonds are maturing quickly and the money can be re-invested into higher income opportunities.