Where to invest when trouble’s brewing

The prevailing wisdom is that investors will generally achieve the best long-term returns by staying invested through periods of volatility, and that attempting to predict and divest to avoid periods of market drawdown is nigh on impossible. Furthermore, in the instance of fully-fledged global war erupting, it’s likely there would be few places unaffected in the immediate fallout.

That said, when reviewing your asset allocation/portfolio positioning, there are some areas and strategies that may fare better than others should the war in Ukraine continue to escalate. If a war of international scale begins to look probable, there will likely be a flight from risk assets, such as equities.

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Gold

Investors might consider an allocation to gold, such as via the iShares Physical Gold ETC GBP (LSE:SGLN). Gold is considered a haven asset and has already seen its price move up in part in reaction to current geopolitical fragility (namely the Israel/Hamas conflict) and huge purchasing recently from various central banks across the globe.

It’s worth noting that the price of gold is now near historic highs, and the precious metal’s price has not conformed to its typical negative correlation against the dollar and the equity market, so some may be cautious not to over-allocate.

Cash

Very defensive investors may wish to up their allocation to cash and cash equivalents. Rather than physical cash, here I refer to funds that offer short-term, highly liquid, low-risk investments. This could include money market funds (MMFs), such as Royal London Short Term Money Market fund.

• The highest-yielding money market funds to park your cash in

These MMFs invest in a diversified range of high quality, short-term debt instruments, meaning there’s minimal capital risk and good liquidity. The downside is that, should interest rates continue to fall as central banks unwind monetary tightening, the yields on offer in these funds will come down as bonds mature and yields reset to the rate on offer in the market.

Government bonds

Government bonds – particularly those issued by developed countries – can be considered a safer asset class. For governments such as the UK and US, despite being heavily indebted, the likelihood of default is relatively minimal.

Short-dated UK gilts offer a reliable income stream and attractive yields currently, while the trading price of the bonds themselves are not hugely sensitive to any changes in interest rates.

• Everything you need to know about investing in gilts

Investors could consider a passive fund or exchange-traded fund (ETF) such as iShares UK Gilts 0-5yr ETF GBP Acc (LSE:IGL5) or broader gilt exposure via Vanguard UK Government Bond Index.

Investors looking for exposure beyond just the UK may consider the abrdn Global Govt Bond Tracker fund, which invests in investment grade debt issued by governments across the globe.

Commodities

One option that can be an effective hedge against geopolitical risk is commodities. The threat of intra-country tensions and war can see commodity prices (for example, energy and food) rise as disruption to supply chains is anticipated and/or materialises – as was the case following Russia’s invasion of Ukraine in 2022.

The WisdomTree Enhanced Commodity ETF (LSE:WCOB) offers investors a broad and diversified commodity exposure, covering major commodity sectors such as industrial metals, precious metals, energy and agriculture. It has a circa 18% exposure to gold. This ETF combines both passive and active investing. It aims to track the performance of the so-called rule-based index, the Optimised Roll Commodity, while looking to outperform the widely followed passive Bloomberg Commodity Index over the long term.

• Are commodities the key to a smoother ride?

The fund is well positioned to benefit from the current market climate and potentially deliver higher real returns. Its effective cost management and lower risk profile gives the strategy a competitive advantage against other funds in the sector.

Wealth preservation trusts

If you are looking for a singular, one-off solution, a good option could be a wealth preservation trust, such as Capital Gearing Ord (LSE:CGT), which aims to protect investors’ capital and grow it above the level of UK inflation over the long term. It does so through a defensive, long-only multi-asset portfolio of equities (accessed mostly via funds and trusts), bonds, property, as well as infrastructure, gold and cash.

It’s a highly diversified portfolio of assets, with a number of holdings being negatively correlated with risk assets, to protect the downside. Currently, equities and funds make up just one-third of the portfolio, while government bonds, both conventional (19%) and index-linked (35%) form the largest allocation.

• Is it time to come out of cash? And what to buy now

While some trusts are apt to suffer volatility as the price deviates from the net asset value (NAV), Capital Gearing Trust controls its discount via buybacks/share issuances to mitigate this risk where possible and smooth the ride for investors.

The trust has been managed by the long-tenured Peter Spiller since 1982, alongside a team of other experienced co-managers, and is a good option for those anticipating a bear market.