Funds to recession-proof your investment portfolio


The UK economy is highly likely to fall into a recession due to coronavirus and people being told to stay at home, with some experts saying it is now ‘imminent’.

Markets continue to be rocked by the ongoing coronavirus pandemic and the economic problems it is causing around the world, with both the FTSE 100 and 250 closing down another 3.8 per cent yesterday.  

Yesterday, the Organisation for Economic Co-operation and Development (OECD) secretary general Angel Gurria told the BBC it was ‘wishful thinking’ that economies could quickly bounce back from the Covid-19 outbreak, and that its initial prediction that the virus could halve global growth was too optimistic. 

Fears of the UK economy falling into a recession have heightened amid the coronavirus panic

Meanwhile the Financial Conduct Authority has asked companies to delay the publication of their preliminary financial statements, many of which were due over the coming days.

This has led some investors to believe a temporary closure of the stock market may also end up being suggested. 

But what exactly is a recession and what does that mean for you?

Technically, a recession occurs when there have been two consecutive quarters of negative gross domestic product (GDP) – in other words, when the economy has contracted rather than grown, for six months. 

The GDP figures for this quarter are not due yet, as the three months in question are not up until the end of this month, but with a contraction in activity over the last month, it would be surprising if the economy did not shrink between the start of the year and the end of March.  

Darius McDermott of Chelsea Financial Services said ‘all the indications are that the global economy will slow for some time and a recession is imminent’.

He said: ‘We are in the midst of a global health worry. All the time the virus is spreading, consumers either don’t want to go out and consume, or are not allowed to go out and consume. 

‘This is having a knock-on effect for areas like bus and train travel, as well as the huge impact it is having on restaurants and entertainment venues for example.

‘Consumption is basically falling off a cliff and it makes up a huge amount of Western GDP – so it will have an impact.’

Another thing that isn’t for certain is how the economy will react if and when the virus eventually stops spreading. 

Consumer spending may suddenly rise, causing a fast and big bounce-back, or it could take a long time for consumer confidence to return. 

Shore Financial Planning's Ben Yearsley said GDP figures would be 'horrendous' in the case of a nationwide lockdown

Shore Financial Planning’s Ben Yearsley said GDP figures would be ‘horrendous’ in the case of a nationwide lockdown

McDermott added: ‘Recessions are not new and do occur reasonably regularly – there was one in the 50s, 60s, 70s, 80s and 90s and the most recent was 2008/2009 on the back of the global financial crisis. 

‘Some were caused by oil crises, some due to central bank mistakes – both of which could also exacerbate today’s situation. But at the moment, this would be a health-led recession.’     

Meanwhile, Ben Yearsley of Shore Financial Planning said the next quarter from April to June ‘will be horrendous if the lockdown goes on for more than a few weeks’.

He added: ‘The last quarter of last year was already slow due to the election and Brexit and was estimated to be flat in the Office for National Statistics announcement on 11 February.

‘If that gets revised down, which often happens (as well as up) and the quarter ending 31 March is also down, then that would make an official recession.’ 

Funds and trusts to recession-proof your portfolio

Past performance is not an indicator of future performance and there is no way to know how an investment could turn out – especially in such uncertain times – but there are certain funds that offer a more defensive approach and may help minimise losses during a recession.

McDermott suggests AXA Framlington Health which invests in a sector that is usually more defensive than most in general. 

‘People need healthcare in good times and in bad times,’ he said. ‘Given the cause of the current problems, healthcare companies are frontline in terms of basics to deal with mild symptoms, as well as those looking for vaccines and cures.

‘Polar Capital Global Insurance is another option – again we need insurance in good times and bad, and many insurances are necessary by law.’

He also recommends the SVS Church House Tenax Absolute Return Strategies fund which sits in the targeted absolute return sector, but is ‘basically a multi-asset fund that has capital preservation at its core’. 

He added: ‘It doesn’t short or do anything fancy, it just diversifies. Year to date it is down 5.9 per cent. So far less volatile and can be adapted to suit different environments.’ 

Meanwhile, Ryan Hughes, head of active portfolios at AJ Bell, agreed it is highly likely a recession will occur, although its length will depend on how quickly the coronavirus starts to wane.

‘As a result, defensively positioned investments that look to protect capital could be appropriate,’ he said. ‘While many absolute return funds have failed to deliver on expectations, one that I regard highly is the Janus Henderson UK Absolute Return fund. 

‘This fund looks to profits from share prices going both up and down and aims to outperform cash with low volatility. The managers are very experienced and have successfully protected assets during previous sell offs but the trade-off is the fund is expensive and has a performance fee. 

However, if it delivers on its objective while equity markets are tumbling, this is a price worth paying.’

For an alternative option in the investment trust sector, Hughes recommends the Personal Assets investment trust, managed by Sebastian Lyon at Troy.

He added: ‘The trust looks to protect and increase the value of the assets while avoiding excessive risk. It has a portfolio of high quality equities, government bonds, gold and cash, giving an instantly diversified portfolio. 

‘While it is not immune to market falls, it tends to have lower volatility than pure equity funds and has the potential to protect capital when markets get ugly.’  

In times of market uncertainty, safe havens such as gold and government bonds are usually the go-to for many investors. But as Yearsley notes, that has already happened, and with the latest 1 per cent interest rate cut in the US, this is effectively already priced in to bond markets. 

‘So you have to look to equity funds and companies with strong balance sheets and low levels of debt that can survive a recession and come out the other side,’ he added. 

‘If you want a multi-asset fund then Troy Trojan with its mix of shares, government bonds and gold is probably a good recession-focused fund. The open-ended sister fund of Personal Assets, its primary focus is to maintain the real value of capital over the long term, ie keep pace with inflation. 

‘They will vary the mix of gold, equities and bonds depending on their economic view and assessment of where value is.’

Yearsley also recommends the renewable energy sector, despite the sharp fall in oil price, as there will be an increase in energy with more people spending time at home.

He suggests looking at investment trust Foresight Solar or Time UK Infrastructure Income, which is a fund of investment trusts investing in the renewables and UK infrastructure space. 

China's markets appear to be on the mend - a sign of things to come for the rest of the world?

China’s markets appear to be on the mend – a sign of things to come for the rest of the world?

Is China ahead of the curve? 

As the ‘birthplace’ of the coronavirus, China was the first country to be severely hit by illness and fatalities but according to reports, appears to have passed its peak and recently experienced its first day of no new cases in certain regions. 

For comparison, Italy is now experiencing a significant number of daily infections and deaths and there are suggestions that the UK is three weeks behind.  

With Chinese funds hit first, a better picture could be painted for investments there,

McDermott said: ‘It’s a big call, but the Chinese stock market has fallen a lot less than the UK one for example – the MSCI China is down 4.3 per cent versus 32 per cent for the FTSE All-Share year to date. 

‘China also has a government that can do what it wants to make sure economic growth stays positive. We like Invesco China Equity – run by two very experienced managers and down just 01.7 per cent year to date in sterling terms.’ 

Meanwhile a survey by Fidelity found China appears ‘best placed to emerge soonest and with least damage from the global coronavirus pandemic’.

The pulse survey of 152 Fidelity International equity and fixed income analysts found among those expecting the virus to lower earnings for the companies they cover, 85 per cent of Fidelity’s China analysts expect that hit to be contained to the first half of the year, compared to just 42 per cent of analysts covering other regions who expect the impact to extend into the second half.

And despite 87 per cent of Fidelity’s China analysts expecting the virus to damage profitability, the highest of any region, they expect the magnitude of that hit to be milder than other regions.  

Fiona O’Neill, deputy head of equity research at Fidelity International said: ‘Since China was the first country afflicted by the virus it seems logical it will recover the fastest. 

‘But the time taken to resume business activity in countries struggling to cope with the outbreak will also depend in large part on the containment measures taken by individual governments.

‘The Chinese authorities’ decision to impose strict travel restrictions in affected areas relatively early in the outbreak seems to have ensured the country will face a broad-based shock to the system, but will recover relatively quickly and with less of an impact to earnings overall, as long as it doesn’t see a second wave of the virus.

In the West, efforts have centred on slowing the spread but avoiding economic shutdowns for as long as possible. The difference between the approaches is difficult to predict at this stage.’ 

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