Three low volatility funds to protect your portfolio

Last week was another volatile one for investors with the main equity indices experiencing further sharp falls. Those who are uncomfortable with this may want to move part of their portfolio into low volatility funds that invest in different asset classes in an effort to produce steady returns in all market conditions.

One such is the £2.8 billion Pyrford Global Total Return fund that uses the traditional approach of investing in bonds and equities to generate positive total returns. It currently has 51% in UK bonds, 16% in overseas bonds, 10% in UK equities and 19% in overseas equities with the balance in cash.


Since they were launched in January 2009 the class A accumulation shares have generated annualised returns of 4.65%. Analysis by Hargreaves Lansdown suggests that the fund has successfully sheltered capital more often than not during tough times on the stock market, while generating long-terms returns ahead of inflation.

Another option is the £508 million Brooks Macdonald Defensive Capital fund that aims to deliver positive absolute returns over rolling three-year periods in a range of market conditions, with less volatility than equity funds. It does this by investing in securities that don’t rely on market growth to achieve returns, such as preference shares, convertibles and structured notes.

The managers try to create a portfolio whose performance is ‘predictable’ by investing in assets that have ‘fixed returns’. Their largest exposures include: structured notes (23%), convertibles (18.7%), bonds and loans (16.8%), discounted assets (10%), and real assets (9.1%).

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SVS Church House Tenax Absolute Return Strategies targets positive returns over rolling 12-month periods and LIBOR plus 4% over rolling three-year periods. According to FundCalibre, it has achieved positive one-year returns in 97% of rolling 12-month periods over the past five years, with an average return of 5.5% and volatility of just 27% of that of the FTSE All-Share index.

The managers of the £180 million fund have a huge amount of flexibility and can invest in a whole range of asset classes including equities, infrastructure, hedge funds, convertibles and index-linked bonds, although most of the portfolio is currently invested in Treasury bills, floating rate notes and fixed interest.

Last week’s equity market sell-off was triggered by the risk of a trade war between China and the US, but if the catalyst is rising bond yields – as it was earlier in the year – it could spell trouble for traditional bond and equity portfolios as both asset classes would be expected to weaken at the same time.


More flexible funds like the Tenax one have the scope to protect investors by moving into other asset classes such as floating rate notes where the coupons increase with interest rates. These now make up 42% of the portfolio, which is the highest it has ever been.

Many of the major equity indices including the Dow and the FTSE are trading more than 10% below their recent highs. Unless you are ultra-bullish a low volatility fund would be a good place to sit it out until things calm down.