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8 defensive funds should Europe cause a crash

Are your investments sufficiently balanced should the eurozone crisis provoke a stock market crash? This update of our ISA tips should help.

 
8 defensive funds should Europe cause a crash

Are your investments sufficiently defensive should Deutsche Bank’s forecast of a eurozone inspired market crash prove correct?

The most defensive short-term tactic is to go into cash. However, timing the market is very difficult. You may get out of the stock market in time but will you re-enter in time to capture the rally when the turbulence and fears subside?

ISA tips update

To help you we have highlighted eight funds that we recommended in our ISA tips series in March. All the funds are defensive – and either featured in ‘how to defend your investments as markets tumble’, an article we published as markets looked rocky towards the end of the tax year; or in ‘5 ISA tips for starter investors' people looking for one fund to buy and hold for the long term.

By defensive we mean funds which, in various ways, have balanced portfolios with a mix of assets that aim to minimise losses when markets fall, but capture some of the growth when markets race ahead.

How have they done?

So far so good. Since 30 March, when we first published our ISA tips series, all the funds have increased in value and beaten the FTSE 100, which grew just 0.25%, and the MSCI World index, an index that measures global stock markets that lost 0.3%.

All the funds have good longer-term track records over three or more years.

Although these funds will not always be the best performers, the analysts in our Citywire Selection team who chose them still think they are good bets for the future.

It is also worth noting that several of these funds are invested in banks, whose shares could be hit if the eurozone crisis causes a financial panic. However, these holdings tend to be in big global banks such as HSBC (HSBA.L), which should be able to ride out any storm.

1. Trojan

Trojan fund factsheet
Unfortunately, Trojan, our top performing fund is not open to new investors. However, existing shareholders will be smiling having seen their money grow by 5.6% since the end of March. Fund manager Sebastian Lyon is well known for his cautious stance that has seen him load the fund up with cash and index-linked gilts (UK government bonds whose return is linked to inflation). This approach has seen the fund produce nine consecutive years of positive returns, a rare feat in the investment industry.

2. M&G Optimal Income

M&G Optimal Income
This fund invests in bonds, an asset class traditionally seen as more defensive than shares. However, bonds are looking highly vulnerable as inflation rises and following an rally caused by the government buying back gilts in order to inject money into the sluggish economy. Nevertheless, as the future is always uncertain it is a good idea for cautious investors to keep some of their money in bonds. M&G Optimal Income manager Richard Woolnough is a safe pair of hands for this job. With this fund he has the flexibility to invest widely within bonds and has the power to short stocks, ie, make money when their value falls. Since 30 March the fund has gained 2.4%.

3. Ecclesiastical Higher Income

Ecclesiastical Higher Income fund factsheet
Fund manager Robin Hepworth has recently added to defensive investments in pharmaceutical stocks, such as GlaxoSmithKline (GSK.L), telecoms, such as Vodafone (VOD.L), and utilities, such as Scottish & Southern (SSE.L). Wary of the indebtedness of many European countries, including the UK, Hepworth has increased his interest in Asian companies and continued to shy away from UK banks. With a remit to invest globally in shares and bonds Citywire AA-rated Hepworth has helped this fund grow 2.1% since the end of March.

4. Investec Cautious Managed

Investec Cautious Managed fund factsheet
The last time we spoke to fund manager Alastair Mundy he had reduced the fund’s investment in UK shares thinking there were better value opportunities elsewhere, such as Japan. Typically, Mundy holds between 50% and 55% in UK equities, but recently that has dropped to around 36%. Outside shares a big slug of the fund is in Norwegian bonds, which have done well on the back of a strong krone. Investec Cautious Managed has made 1.7% since the end of March.

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18 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Jul 18, 2011 at 08:28

This really isn't very insightful, you are recommending some funds that still have a relatively high weighting towards equities. The funds that have traditionally done well in stock market crashes are CTAs / Managed Futures which adopt a trend-following approach as crashes often lead to prolonged downward trends which they can exploit.

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brian potter

Jul 18, 2011 at 09:51

Newton real returns looks ok and it gives an income of abour 3.5% even if its capital value is going crazy.

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Stephen Doyle

Jul 18, 2011 at 10:56

Personal Assets IT, which Sebastian Lyons also runs, has almost the same portfolio as Troy. Has a zero cost investment plan/ISA

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Richard White

Jul 18, 2011 at 11:34

Don`t be fooled by a headline income figure,as if it is taken from capital it is not a true reflection of the `clean` yield of the fund.

All the investor is getting is a partial return of capital.

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A C Wiltshire

Jul 18, 2011 at 11:46

I can understand why you picked the Ruffer Inv Co although my own preference is for the Ruffer Total Return OEIC.

But why not include Ruffer European which has an extremely good record of steering it's way through difficult times.

Also missing from your list is Miton Special Situations, which has a high weighting to cash. Or for that matter Miton Strategic Portfolio, same manager but an even higher weighting to cash (last time I checked).

If income is an important consideration and you want to avoid bonds I can't think of a better choice than Troy Trojan Income managed by Francis Brooke.

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Gordon

Jul 18, 2011 at 16:21

What about L&G Index linked Gilt Index or are I.L Gilts now too expensive

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Tom McCall

Jul 18, 2011 at 19:55

If Greece defaulted it would have to leave the European Union. If Greece left, then Portugal, Spain, Ireland and Italy may not be far behind. In this event, it clould spell the end of the European Community. In its place would probably grow phoenix like a Trading Eurozone which is what Europe should have been from the fifties. From this, Europe could grow as big as China so let nobody live in fear of a Eurozone crash! The only thing to stop this from happening would be the big-state socialist politicians who do not understand markets.

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iain millett

Jul 20, 2011 at 07:32

My own view is that we will end up with extending the maturity of the junk euro bonds of Greece etc whilst efffectively starting up a core euro zone group - leaving the junk lot with an ERM type link to the euro core. WIth complete fiscal union, a system of regional grants would become available but the core nations don't want it!

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jones the spy

Jul 20, 2011 at 10:55

If it is defensive position we are looking for why not go for Worldwidehealthcare trust (wwh) this should weather any financial storms which may be ahead. Health care is and will always be in demand from an ageing population. The yield from these stocks are usually good.

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Franco

Jul 20, 2011 at 14:16

People who are recommending bonds should explain why the forthcoming higher interest rates will not depress their price. Or do they think the present bank rate is permanent?

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Grumpy Old Man

Jul 21, 2011 at 07:07

Can't see the point quite frankly.I f there is a crash everything will be clobbered.O.K. if you are already invested in some of these funds but if not,why bother.

Keep any cash you have on the sidelines,review existing holdings and then batten down the hatches.Prepare to invest cash when some of the dust has settled.

IMHO,the definition of a defensive fund or stock is one that fully participates in any downfall,but only partially recovers when the market turns up!

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Michael Peters Fenwicks

Jul 21, 2011 at 08:51

Nothing new here as most investors have priced in defensive strategic mechanisms in portfolios.

I guess at this stage you need a portfolio that can observe the losses while looking at the long term picture as its merely an opportunity frankly speaking to buy/increase these expensive asserts at the moment.

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Anonymous 1 needed this 'off the record'

Jul 21, 2011 at 09:22

Ok grumpy old man, pull your money out the market, lose money in cash on an inflationary basis and then try and time the market. Good luck!

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Grumpy Old Man

Jul 21, 2011 at 10:15

Anonymous1,get a grip.When did I say pull your money out of the market?

Read my reply again.I should add that of my assets that are invested in the stockmarket,70% are in my SIPP and the remainder in my portfolio from which I take divis and hope for some capital growth over the longer term...........just like many other people in this country,I suggest.

I sold a very small % of my SIPP holdings (mainly financials,showing a loss) some weeks ago and at the same time took profits in a fund biased towards commodities which had shown me almost 300% growth.As things stand I have no plans to sell anything else in either of my portfolios.I can time the market no better or worse than anyone else;I am not thick,nor am I a genius.Lose money on an inflationary basis eh! Well I am quite prepared for that and it may well prove ....if a crash occurs to be a wise move.I can then move it back in the markets as I said,when some of the dust settles.I do not have an enormous amount in cash,probably around 17%. Besides that cash I have saved in cash isas for a number of years and through the troubled times the effect of compound interest has provided me with a nice sleep easy investment.

Good luck in whatever you do,but please read before replying to other posters.

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Luichicornish

Jul 24, 2011 at 12:25

I agree with Tom McCall, Politicians can't buck-up the market.

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David Meyer

Aug 03, 2011 at 21:05

Sell financials; buy utilities

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Michael Peters Fenwicks

Aug 04, 2011 at 08:20

Chaps I hear all arguments about defensive strategies but surely these decisions should have been made as early as the start of the year instead of exchanging "SWAPS" when conditions call!!!!!

It is part of the planning in terms of risk assessment toward managing the portfolio - Proper Planning Prevents Poor Performance!!!

Price in all strategies early and avoid playing catch ups!!!

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Scorpio15

Aug 08, 2011 at 17:27

How can I check the asset class of a fund? I have several funds of all categories but I don't know if I have repeated them.

Please help and thanks a lot for your comments..

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Look up the funds

  • Trojan O Inc
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  • Ecclesiastical Higher Income A
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  • Investec Cautious Managed A Acc Net
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  • Newton Real Return A GBP Inc
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  • Jupiter Merlin Growth Portfolio Acc
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  • Veritas Global Equity Income GBP A
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Look up the shares

  • HSBC Holdings PLC
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  • GlaxoSmithKline PLC
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  • Vodafone Group PLC
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  • Scottish and Southern Energy PLC
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Look up the investment trusts

  • Ruffer Investment Company (Ordinary Share)
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Look up the fund managers

  • Richard Woolnough
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  • Sebastian Lyon
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  • Robin Hepworth
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  • Alastair Mundy
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  • Iain Stewart
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  • Steve Russell
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  • John Chatfeild-Roberts
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  • Charles Richardson
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