Don’t let a Greek farce turn into a tragedy

The main focus of the markets is the growing realisation that Greece could default on its debt obligations and leave the euro. Negotiations have stalled and it may be impossible to reach agreement on the cash for reforms deal with the EU and IMF. If that is the case the country would not be able to afford the €1.5bn repayment due at the end of the month.

The talks have been going on for years and there is a good chance that with so much at stake both sides will find a way to kick the can a little further down the road. Unfortunately the day of reckoning cannot be deferred for ever and the prospect of default will hang over the markets until the situation is finally resolved.

Those who are uncomfortable with this should consider reducing their risk by moving some of their money into cautiously managed funds. These should protect you against the worst of any falls, while still allowing you to benefit from the upside potential of the markets.

There are three potentially suitable investment trusts that spring to mind and they have all delivered steady returns while successfully limiting the downside risk.

The first is the Personal Assets Trust (PNL), which aims to protect and increase shareholders’ funds over the long-term by investing in equities and bonds. Since March 2009 it has been managed by Sebastian Lyon of Troy Asset Management.

Lyon has an extremely cautious outlook because he believes that Quantitative Easing won’t work and could lead to a market crisis. To guard against this he has invested 40% of the fund in a highly concentrated portfolio of defensive blue chip stocks, with a further 23% in UK and US index-linked bonds. There is also 10% in gold and 27% in cash.

PNL will lag behind in a strongly rising market, but should preserve capital in more difficult conditions and has shown itself capable of delivering attractive absolute returns at a low level of volatility.

The same can also be said of the Ruffer Investment Company (RICA). This was launched in 2004 and aims to protect capital while generating absolute returns greater than that available on cash. It is a multi-asset fund with a strong emphasis on macroeconomic input as well as stock selection.

RICA is cautiously positioned on account of the high valuations of many assets as a result of the artificially low interest rates. The fund’s largest exposure is the 41% allocation to a carefully selected portfolio of global equities. There is also 37% in UK and US index-linked gilts, with the balance made up of cash (7%), gold (4%), illiquid strategies (9%) and protective options (2%).

After making a small loss in 2011 it has delivered steady single digit annual returns, which is what you would hope for from this sort of mandate, but to really appreciate it you have to look back at the financial crisis of 2008 when it rose 23%.

The other fund that I want to mention is RIT Capital Partners (RCP), which was also featured in my recent post ‘we are all in it together’. RCP aims to deliver long-term growth, while preserving shareholders’ capital. It has built up a superb track record and captures more of the upside than the others, but is more exposed to the downside risk.

RIT has a highly unusual portfolio that contains a handful of high conviction stocks, as well as unlisted shares, an active currency overlay and specialist managers running segregated mandates. There is also an element of downside protection.