Five holdings giving funds protection today

This article first appeared on professionaladviser.com on 29th September 2022

“We find ourselves in a scarcely credible era of uncertainty. Domestic politics, geopolitical tensions and war, inflation, labour shortages, recession, strikes, energy shortages; all these factors have the capacity to heavily affect the outlook for the companies in which we invest.

“All the issues are fixable but not without strong leadership. That’s the most concerning thing this time around. After similar issues in the 1970s, the 1980s saw Margaret Thatcher, Ronald Reagan, Mikhail Gorbachev and, perhaps most importantly, Paul Volcker (chairman of the US Federal Reserve from 1979 to 1987) provide very strong leadership and guide their countries to recovery.

“I’m a naturally optimistic person, so I scour the TV news and politics programmes for the world’s new generation of strong leaders which will take us towards recovery. I’m still looking. Full recovery may take a long time.”

Those were the rather sobering words of conclusion from Neil Rogan, Chairman of the Murray Income Trust PLC, in its recent annual statement.

And that was before the mini-Budget resulted in the most turbulent week in UK markets for years.

Everything goes down

The pound hit a new low against the dollar (bringing it worryingly close to parity), government bond yields spiked (the 30-year gilt hit 5.17% at one point, the highest it has been since 2002), the FTSE fell below 6,900, and many mortgage lenders took deals off the table as they are unsure how high and how fast interest rates will now have to rise.

Both the International Monetary Fund and the Bank of England felt compelled to step in, citing concerns over “serious negative consequences” and “increased inequality”, not to mention “material risk to UK financial stability”.

To quote Lenin, there are decades when nothing happens and there are weeks when decades happen.

With so much going [on] in [the] markets, it’s hard to know what investors should do. So instead of trying to guess, I asked five fund managers which holding in their fund is currently giving them the most protection.

Here’s what they had to say

Jason Borbora-Sheen, co-manager of Ninety One Global income Opportunities

“That would have to be short positions in equity index and bond futures. Luckily, the fund has a broad and flexible toolkit at its disposal to actively manage risk without having to sell the underlying income generating securities that act as the engine of returns.

“During this year’s tumultuous markets, we reduced equity sensitivity via equity index futures. This has been effective during a time when relying on traditional safe havens would have compounded loses. Further, we have reduced our overall sensitivity to interest rate changes through bond futures; this has provided useful protection as yields rose with central bank policy tightening to fight inflation. Overall, the breadth of the toolkit has enabled us reduce risk and limit weakness against a backdrop where all major asset classes have suffered significant falls.”

Peter Ewins, manager of The Global Smaller Companies Trust

“There are always some companies which are able to do well, even in tougher times. I’d mention a few names which are holding up well for now. Qinetiq, the UK defence services company is seeing an improved demand outlook for some of its business lines, as a consequence of the Ukraine situation. The company has also recently expanded its scale by buying a US-based peer.

“Another area, which for now is proving resilient, is container-board packaging, with companies like US-listed Graphic Packaging, being helped by the consolidated nature of their industry and the longer-term trend for more goods to be sent out in this form of packaging via online channels. Finally, niche markets abound at the small-cap end of the market and Begbies Traynor in the UK insolvency services field is now benefiting from an upturn in the number of companies running into trouble, as a result of the slowdown.”

Gordon Shannon, co-manager of the TwentyFour Corporate Bond fund

“It has to be New York Life 1.625% 2023. It’s a AAA rating, yielding 4.42% and has a forward breakeven of 3.54% – meaning the yield would have to rise to over 7.96% for us make a negative total return on this bond over a one year holding period.

“It’s very difficult, if not impossible, to imagine a combination of front-end gilt movements or credit concerns on such a high-quality institution leading to a yield approaching 8%. Meanwhile 4.42% is a healthy return, not far off the index’s 5.2% yield, which has far more duration downside.”

Chris Garsten, co-manager of Waverton European Capital Growth

“While plenty of uncertainty remains, we are trying to protect our portfolio by rebalancing into the best opportunities that the market is offering. We have bought into the Finnish pulp and paper company UPM Kymmene, for example.

“In terms of P/E it is a value company, but we think it has a great growth profile. It has three transformational projects, Paso de Los Toro Pulp (a super low-cost pulp mill starting up in Uruguay), OL3 (new nuclear power plant in Finland meaning it will be a significant net energy seller) and next year, the start-up of Leuna (biochemicals  transforming wood into plastic bottles, with Coca Cola as a launch customer). Even after this capex binge, net debt is minimal. The key is to have value stocks with a growth element to them.”

Kelly Prior, investment manager, CT MM Navigator Distribution team

“The answer to this depends on your timescale. All asset classes are likely to be volatile – arguably the more ‘risk free’, the increase in volatility, until the market has more certainty on even the most basic things like inflation, growth and central bank policy.

“Cash doesn’t protect you against inflation as it is losing its true value by the day, so given this, the asset that protects you best, is the one with the eye on the longer-term prize. So, whether it is Jonathan Golan and team running the Man GLG Sterling Corporate Bond fund, or Clive Beagles and James Lowen looking at income paying equities through their JOHCM UK Equity Income fund, the best place to put your money is with those that are not distracted by the noise.”