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It has been a brutal start to the year with the coronavirus taking its toll on the markets, but it is at times like this when the more defensive funds should earn their keep.
At time of writing, the FTSE 100 and FTSE 250 indices were both down around 13% year-to-date, with the S&P 500 losing nine percent. Last week was especially challenging and Friday turned into a real rout with many equity-based funds and investment trusts losing four percent or more on the day.
I have often written in the past about the defensively-oriented investment trusts that aim to preserve and then grow your capital. These tend to look dull compared to their racier counterparts, but it’s at times like these that they should outperform, so it’s well worth taking a look to see how they have done.
Personal Assets and Capital Gearing
One of the best examples is the £1.1bn Personal Assets Trust (LON:PNL), which is managed by Sebastian Lyon. This is defensively positioned with 30% invested in US index-linked bonds, 26% in cash and cash equivalents, nine percent in gold and the remaining third of the portfolio in high quality UK and US equities.
Year-to-date it has held up remarkably well with a loss of just over two percent and the longer term returns are also impressive. Over the last decade the share price is up 72%, compared to the 93% increase in the FTSE All-Share benchmark, which is a good achievement given the defensive mandate.
Its nearest equivalent is probably the £484m Capital Gearing Trust (LON:CGT), which has a similar portfolio. At the end of January it had 31% in UK and US index-linked bonds, as well as 19% in conventional government bonds and a further ten percent in corporate debt. There was 34% in funds and equities, with the other six percent in cash and gold. YTD it is down about 1.1%, while over the last decade it has made 80%.
The other trust that I would bracket with these two is the £406m Ruffer Investment Company (LON:RICA). Like the others it has around a third of its portfolio in index-linked government bonds, with cash and short-dated bonds making up a further 12% and gold/gold equities eight percent. It has a slightly higher allocation to equities at about 42%, but what really differentiates it is its illiquid strategies and options that should protect it in the event of a seizure in the credit markets.
RICA has built up a good long-term track record of delivering consistent growth with low volatility. Since the launch in July 2004, the NAV total return is 187% (6.9% per annum) with annual volatility of eight percent, which compares to the 208% return (7.4% per annum) for the FTSE All-Share, with a volatility of 15.5%.
Its most impressive achievement was in 2008 during the global financial crisis when the NAV rose 26% while the FTSE All-Share fell 30%. Recent performance has been much more lacklustre and YTD it is down six percent, with the discount opening up to seven percent, the widest it has been in the last decade.
Less risk averse investors might prefer the £3.5bn RIT Capital Partners (LON:RCP), which captures more of the upside while trying to limit the downside. It has suffered a bigger hit YTD with the shares down around ten percent, but over the last decade it has returned 118%. The shares have moved from a premium to a five percent discount.
If you think that the sell-off will continue and want to hedge your portfolio there are a handful of funds that are short the market. The $71m Odey Odyssey is more than 100% short and has been a terrible performer losing 30% during the bull market of 2019, but is up about ten percent YTD. There is also the Wisdom Tree FTSE 250 1X Daily Short ETF (LON:1MCS), which provides the inverse daily performance of the FTSE 250 index.
Investors with well-diversified portfolios that include defensive funds like those above will find it a lot easier to withstand the sell-off than those who went into it with too much risk. The short funds would only be suitable for experienced investors who are comfortable taking a punt on how things will turn out from here.