Beyond wealth preservation trusts, nine other defensive options

Wealth preservation investment trusts are popular with DIY investors and for good reason, but a range of other defensive strategies are worthy of consideration, finds Jennifer Hill.

The gathering of storm clouds tends to have investors running for cover but with sudden swings in the investment climate more commonplace than ever, it is best to have some shelter in place before the rain starts lashing.

Flexible investment trusts like Capital Gearing (LSE:CGT), Ruffer (LSE:RICA) and Personal Assets (LSE:PNL) have strong long-term track records in both protecting and growing capital, but investors should consider casting their nets wider to other defensive strategies, provided they are sufficiently differentiated.

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RIT Capital Partners (LSE:RCP) also seeks to protect capital, and is another favoured option among retail investors. However, its recent performance has been less stellar, amid investor nervousness around private equity, which accounts for just over 40% of its assets. Peel Hunt analyst Anthony Leatham is finding value in its 20% discount.

“Buying a diversified portfolio with this return profile at these levels can add a lot of value alongside more defensive strategies and, importantly, can provide up-market participation as markets improve,” Leatham adds.

However, rival analyst Investec a couple of months downgraded RIT Capital Partners from a buy to a hold. It noted that the risk profile of the trust has been “radically transformed following a strategic allocation towards venture capital and strong organic growth of these investments in recent years”.

For investors looking beyond this quartet we spoke to a range of experts to gather nine other defensive options for investors looking for defensive ballast.

Trojan

Progeny Asset Management has held the Trojan fund in the alternative allocation within its ProFolio fund range since the latter launched in January.

“Although it’s not an absolute return fund, Troy’s mindset is capital preservation, which has resulted in lower drawdowns in volatile markets,” says Robert Harrison, Progeny’s head of research.

The managers change the asset allocation depending on the economic backdrop and market conditions.

“This flexibility allows them to buy more defensive assets like index-linked government bonds and short-dated bonds when the economic backdrop is deteriorating and increase the equity allocation when the economic backdrop starts improving,” adds Harrison.

The fund manager of Trojan fund, Sebastian Lyon, also manages Personal Assets Trust.

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Janus Henderson Absolute Return

Long/short fund Janus Henderson Absolute Return has been a consistent performer for Quilter Cheviot since 2017.

“The strategy runs a defensive lower-risk, lower return profile than the typical equity long/short fund,” says Nick Wood, head of fund research at Quilter.

The fund is primarily invested in UK equities, which has been a good place as of late, but can also invest overseas.

“The managers focus on a blend of longer-term core holdings and short-term tactical positions and have been increasing the fund’s gross exposure in response to what they see as an improving opportunity set,” adds Wood.

Neuberger Berman Uncorrelated Strategies

Arbuthnot Latham’s favoured defensive fund is multi-strategy hedge fund Neuberger Berman Uncorrelated Strategies, which it has used as a core holding since May 2021.

“The fund offers strong risk management protocols and diversification benefits from traditional markets and serves as the bedrock of a hedge fund allocation that sits within our multi-asset portfolios,” says Eren Osman, managing director of wealth management at Arbuthnot Latham.

The portfolio of diversified strategies aims to return cash plus 5% and exhibit low correlation to equity and bond markets over a market cycle. “That makes it well suited to provide ballast in times of a market correction,” adds Osman.

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Ecofin Global Utilities and Infrastructure

QuotedData points to the defensiveness of the utilities and infrastructure sectors given steady demand as well as the structural growth potential amid the need to transition away from fossil fuels and upgrade existing infrastructure. It yields 4%.

“Although fluctuating power prices and windfall taxes can have an impact, the manager of Ecofin Global Utilities & Infrastructure (LSE:EGL) suggests that earnings guidance for utilities is conservative and thinks that valuations are undemanding, which lends some downside protection,” says James Carthew, head of investment companies at QuotedData.

Pantheon Infrastructure

For direct exposure to infrastructure assets Carthew recommends Pantheon Infrastructure (LSE:PINT). It makes co-investments primarily in digital infrastructure, such as data centres, fibre and telecom towers, with the aim of generating predictable and often inflation-linked cash flows to return 8%-10% per annum to shareholders.

“The trust is operating in sectors experiencing structural growth and the investments that it backs should have strong ESG [environmental, social and governance] credentials,” says Carthew.

He adds: “A core part of its marketing message is that the cash flows are relatively insensitive to economic cycles, which ought to make it resilient in falling markets.”

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ARC TIME UK Infrastructure Income

BRI Wealth Management uses the ARC TIME UK Infrastructure Income fund to access a number of infrastructure investment trusts. It yields over 5%.

Tom Hopkins, a portfolio manager at BRI Wealth Management, points out: “UK infrastructure investment trusts have struggled over the last 12 months and most continue to trade well below their net asset values despite largely encouraging and resilient financial results.  

“Worries over interest rates and valuations have spooked investors. But investors with long time horizons could see the funds’ current share prices as an opportunity for diversified income and capital uplift as the prices of these investment trusts eventually recover.”

JP Morgan Core Real Assets

JPMorgan Global Core Real Assets (LSE:JARA) has worked well since it was added to IpsoFacto Investor’s balanced strategy in January 2022.

“It has more than held its value while equity markets have fallen and paid 7% in dividends,” says director David Liddell.

The trust predominantly holds US and Asian real estate, transportation and infrastructure assets.

“It is mainly exposed to US interest rates, which are perhaps closer to their peak than elsewhere in the world,” adds Liddell.

The current discount of around 20% offers some protection from increased discount rates used to value private assets in light of higher interest rates.

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iShares Ultrashort Bond ETF

Rising interest rates mean that cash-like assets such as money market funds and certificates of deposit are generating attractive yields for the first time in many years. Ravenscroft, a wealth management firm, uses the iShares £ Ultrashort Bond ETF GBP Dist (LSE:ERNS) as a cash proxy in portfolios.

“Its role is to provide some liquidity and ballast,” says fund analyst Shannon Lancaster.

She adds: “Ultrashort bond ETFs are a good tool for preserving assets while earning an income. They are made up of short-term investment grade corporate bonds and money market instruments, and while they have slightly more risk than cash, they should not be overly volatile.”

Vontobel TwentyFour Sustainable Short-Term Bond

WH Ireland, the wealth manager, initially recommended the Vontobel TwentyFour Sustainable Short-Term Bond fund at the beginning of 2022. It has already demonstrated its downside protection potential by limiting losses to just over 4% in 2022, while certain longer duration peers plummeted by up to 40%.

“The short interest rate duration of the fund at just 1.3 years limits its volatility,” says research analyst Ross McKnight.

The fund, which yields over 6%, has the potential for capital appreciation when we embark on a new stage of the economic cycle and the Bank of England starts cutting interest rates.

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How much exposure should investors have to such funds?

The answer to this question depends on how much of a stomach for risk an investor has to tolerate volatility and drawdowns.

However, as an example, Canaccord Genuity Wealth Management’s balanced model has around 10% in alternative strategies.

Quilter Cheviot also suggests a 10% allocation to the wealth preservation space for a typical balanced investor in today’s environment.

Arbuthnot Latham’s Osman says “a smaller proportion, probably less than 10%, is appropriate” because gilts are now better diversifiers than last year when their yields were in negative territory.