By ADRIAN LOWCOCK 11/08/2011
With markets facing such challenges, the most sensible course for small investors is to take a hard look at their asset allocation to ensure their portfolio is adequately diversified, that there are no ‘wasted’ risks and that the fund managers employed are the best of their breed.
The focus should be on those areas that have proven they can weather market downturns. Ensuring you minimise losses to taxation and charges is also vital, as is the need to block out the short-term noise.
Keep the focus on your long-term financial objectives and you won’t be blown too far off course.
Our top picks
Defensive equity funds
Companies that pay regular dividends have good defensive characteristics and these are generally shared by the funds that target them. We prefer income fund that have limited exposure to banks, which remain at the centre of the crisis.
One also has to be careful of commodity related stocks as they may be most vulnerable to slowing economic growth. A more attractive way to target a defensive UK equity position is with managers invested in quality cash flow stocks that can maintain and grow dividends in sectors such as healthcare, utilities and tobacco and are not index junkies.
Neil Woodford’s Invesco Perpetual High Income and Invesco Perpetual Income funds have extensive long-tem holdings in such sectors. We also see the JO Hambro UK Opportunities fund, which is managed by John Wood and rated five stars as being well positioned for the current market volatility.
Absolute return funds
With markets struggling this could mean it’s time to revisit absolute return funds. Suddenly, the concept of a low volatility fund aiming for modest positive returns, come rain or shine, has much to commend it. But choose carefully, many are offered but few have consistently delivered.
For long-short equity look at Henderson (Ex Gartmore) UK Absolute Return and for macro trading look at Standard Life Global Absolute Return Strategies.
Strategic bonds
With the outlook for debt markets now more uncertain than ever before, it makes sense to find a manager with the freedom to exploit the opportunities created.
Strategic bond funds carry a higher manager risk as investors are handing the investment allocation decision to the manager, but for most investors this is central to their appeal.
Our top picks in this space include Legal & General Dynamic Bond whose manager, Richard Hodges, has proven he can make money whether markets are rising or falling thanks to the sophisticated UCITS III investment powers his fund employs.
We’re also fans of M&G Optimal Income, which seeks to provide a total return sufficient to outperform the average for the IMA strategic bond sector. The fund is rated five stars as is the Aegon Strategic Bond Fund which similarly invests right across global fixed income markets.
The value of investments can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. If you are unsure about the suitability of any investment, you should seek professional advice.