Five funds for the worst-case scenario

Investors are still getting used to a ‘new paradigm’ for financial markets, where inflation and interest rates sit at much higher levels than has been seen in the past decade or so.

For the past couple of years, central banks have been hiking interest rates to control growing inflationary concerns. The result was the fastest monetary policy tightening in four decades.

But there was more optimism towards markets at the back end of 2023, with rate hikes coming to an end. In fact, global equities had a particularly strong finish to the year and produced a 17% return for investors*. The goldilocks scenario from here would be that lower economic growth allows central banks to cut interest rates modestly (something mortgage-holders coming to the end of a fixed rate term would be very happy with), but a deep recession is avoided.

Nevertheless, the economy is still in flux and there remain plenty of risks – not least that the breakneck speed at which central banks introduced policy tightening means it may not have been felt by the global economy just yet. There is often a lag between policy tightening and the economic impact.

A mixed outlook across the globe

While the US appears resilient – with full employment and strong consumer spending – the world’s second largest economy, China, is facing up to extremely weak growth, driven by a real estate and consumer confidence crisis.

Meanwhile, the likes of the UK and the eurozone continue to flirt with recession, with sticky inflation exerting a drag on growth. This is particularly the case when it comes to wage-price inflation. If the jobs market continues to hold up as it is and employees retain some negotiating power on higher salaries, inflation could remain elevated. The knock-on effect would be higher-for-longer interest rates, to the detriment of long-duration growth assets.

There is also a plethora of significant geopolitical threats which could have a negative impact on markets: from the ongoing conflict between Russia and Ukraine, the Israel/Palestine escalation, and China’s claims over Taiwan.

Orbis Global Balanced fund manager Alec Cutler’s feels there are currently four negative contributors to the economy – higher levels of inflation; the “scary” levels of indebtedness; rising global conflict – and the impact it has on international trade; and valuations – which he labels the “four horseman of the stock apocalypse”.

Figures from the World Bank show that the economy is set for its worst half decade of growth in 30 years – with global growth set to slow for the third year in a row to 2.4% in 2024**.

Although you would struggle to find an economist who didn’t predict a global recession in the past 24 months, the major global economies have managed to avoid one so far. However, the shadow of recession still looms as a potential threat to global markets.

With this in mind, here are five funds to consider if you want to prepare for a worst-case scenario.

Rathbone Strategic Growth Portfolio

Managed by David Coombs, this fund targets cash plus 3% per annum over a minimum five-year period and has a clear framework to manage risk.

The multi-asset fund focuses not only on returns, but also the correlation of assets and how that impacts overall risk. David uses a disciplined asset-allocation framework and a forward-looking assessment of correlation, risk and return as the cornerstone of the investment process. Asset classes are then divided into three distinct categories: liquidity, equity risk and diversifiers. The liquidity component currently accounts for 25% of the fund***.

Rathbone Strategic Growth Portfolio targets a risk of around two-thirds of equities, so investors are shielded somewhat during market downturns. Over the last five years it has returned 31% to investors****.

Artemis Target Return Bond

Managed by Stephen Snowden, this is a lower risk option for investors, which aims to achieve a positive return of at least 2.5% above the Bank of England’s base rate over rolling three-year periods. The fund invests in bonds of any currency – directly or indirectly – and may also use derivatives to help achieve its objective. This means its assets can include government bonds, corporate bonds, asset-backed securities, and mortgage-backed securities.

While the fund invests globally, and within any industry, no more than 40% of its net exposure will be in emerging market debt securities. This type of fund is never likely to deliver bumper returns. However, that’s not its goal. It’s a portfolio that’s best suited to investors wanting a return, while preserving their capital. Launched in December 2019, it has returned 6.4%^ in the past three years and also offers an attractive yield of 4.6%^^.

JOHCM Global Opportunities

This fund has historically been among the least volatile in the IA Global sector. Manager Ben Leyland has a strong bias towards larger and medium-sized multi-national businesses in his portfolio, which typically holds 30-40 stocks.

The philosophy of this fund is ‘heads we win, tails we don’t lose too much’, and if markets do struggle, we feel the fund’s strict valuation process will help in this regard. The fund also can, and will, hold large cash positions if valuations are unattractive. It has returned 47.4% in the past five years****.

Fidelity Global Dividend

Manager Dan Roberts looks for companies with straightforward business models and predictable, resilient returns, and is happy to pay a fair price for a good company. Dan has two main criteria for selecting companies: the first is valuation support, with Dan wanting to make sure he does not overpay for stocks – regardless of how good they look – as he does not want to dilute returns. The second is the quality of the franchise, with the emphasis on investing in dependable, resilient businesses. It has returned 55.4% in the past five years****, while also producing a historic yield of 2.7%^^.

Polar Capital Global Insurance

This fund typically invests in 30 to 35 companies. Exposure is entirely to insurance firms, but the fund rarely invests in life assurers, preferring to provide exposure to companies in the specialist non-life, casualty and risk sectors.

Managed by Nick Martin, it has proved its ability to generate alpha in all market conditions. When assessing individual companies, the manager emphasises companies with strong underwriting, reserving, balance sheet integrity, capable management teams and inside ownership.

Insurance is a low beta sector and tends to be less volatile than the wider market. That has been reflected by the fund’s performance: it has produced a positive return in nine of the past 10 years, with its only year of underperformance coming in 2020 when it only fell 5.6%^^^. Over the five years it has returned 72.3%****.

Explore the other side of this argument with a more optimistic view of 2024.  

*Source: FE Analytics, MSCI World total return in pounds sterling, 30 December 2022 to 29 December 2023

**Source: World Bank, 9 January 2024

***Source: fund factsheet, 30 November 2023

****Source: FE fundinfo, total returns in pounds sterling, 9 January 2019 to 9 January 2024

^Source: FE fundinfo, total returns in pounds sterling, 9 January 2021 to 9 January 2024

^^Source: fund factsheet, 31 October 2023

^^^Source: FE Analytics, discrete calendar performance in pounds sterling, January 2024