Use established trusts which prioritise protecting your moneyby Andy Davis / November 11, 2020 / Leave a comment
In last month’s column I highlighted a concern for investors that has been rising since the market crash in March: traditional ways of diversifying risks may be losing their potency. Since managing risk is so central to investment success, I want to return to the diversification question and suggest a straightforward way for more cautious investors to address it.
Put simply, the solution is to outsource the problem by considering a few established investment trusts that put major emphasis on protecting against the downside. These trusts typically hold a range of assets—conventional and inflation-linked government bonds, corporate bonds, global equities, gold, cash and some more exotic securities that individual investors will find it hard to access. In effect, therefore, when you buy into them, you are acquiring a ready-made balanced portfolio.
Such trusts include Personal Assets and Ruffer Investment Company, which aim to provide capital appreciation while avoiding big falls. The investment objective of Personal Assets, for example, is “to protect and increase (in that order) the value per share for the funds of shareholders over the long term.”
So given that we have seen serious market turmoil, how did these trusts perform when their stated objectives collided with messy reality?
Shares in both Personal Assets and Ruffer have gained around 7.5 per cent in the year to date, and crucially they have done so with less volatility than almost all other members of their flexible investment peer group, comprising trusts that have rules allowing them to invest in a wide range of assets. A third trust, Capital Gearing, has a similar objective but invests a large proportion of its assets in the shares of other investment trusts. It is up 4 per cent this year with similarly modest volatility.
This shows that the strategies these trusts pursue to diversify risk and protect against big falls have proved themselves in some of the most extreme market conditions. I think they offer a powerful combination: very risk-conscious managers who have been granted wide discretion to invest as they see fit.
Naturally, there are other possible funds out there. The two multi-asset investment trusts run by hedge fund managers Brevan Howard have performed strongly this year, though they have higher charges and are much less transparent about their portfolio…