While such a prospect seemed laughable when the FTSE 100 hit an all-time high in January, its subsequent 10% fall has been enough to give investors the jitters
Although the UK economy continues to recover, with wage growth perking up and interest rates likely to nudge upward at some point, markets could still be destabilised by outside forces, according to Danny Cox, a chartered financial planner at Hargreaves Lansdown.
“The UK stock market is currently pretty unloved, with investors looking overseas because they are worried about the trade uncertainty created by Brexit and how this might damage economic prospects,” he says. “Unfortunately, this is set to rumble on for some time.”
Of course, stock market downturns are part of investing life, but that will be of little consolation to those who invest everything in shares and then suffer crippling losses if everything turns south.
“For long-term investors, there is no substitute for a balanced and diverse portfolio at any time,” adds Mr Cox. “Market downturns are an inevitability, but good fund and stock selections will help protect you over the long term.”
The most obvious way to guard against such a scenario is by holding everything in cash, but the downside is this means little long-term growth and minimal income generation, points out Patrick Connolly, a certified financial planner with Chase de Vere.
When you consider the consumer prices index (CPI) measure of inflation is running at 3% at the time of writing and most easy-access savings accounts are only offering less than 2% interest, the harsh reality is that anyone opting for this route will see the value of their money dwindling over time.
“The best way for most people to protect themselves from stock market falls is through asset allocation,” insists Mr Connolly. “This means selecting a wide range of investments which don’t all rise and fall together.”
For example, you can hold some money in shares to take advantage of their long-term growth potential, and some in other asset classes such as fixed-interest and commercial property that can provide you with some protection if stock markets continue to fall.
“You can achieve this diversification by either investing in all-in-one multi-asset funds, which are essentially a whole portfolio in one fund, or in a range of separate equity, fixed interest and property funds,” Mr Connolly adds.
He points out that multi-asset funds are most suitable for those with smaller investment amounts or those wanting a longer-term buy-and-hold solution. However, many such funds have high charges, as you pay for their manager – as well as managers of underlying funds.
“For those with investment portfolios of more than £50,000 to £100,000, we recommend constructing a multi-asset portfolio, tailored to their individual requirements, by picking separate equity, fixed interest and property funds,” adds Mr Connolly.
Darius McDermott, managing director of Chelsea Financial Services, agrees that multi-asset funds and targeted absolute return funds are among the best options to protect you in a stock market downturn.
However, he warns: “It is important to remember that while they might offer some downside protection, that doesn’t mean that they won’t lose you money. They will probably just lose you less money than the stock market.”
Mr McDermott also points out that if markets don’t end up suffering the expected downturn, investors won’t be fully participating in any market gains, as these types of funds will generally rise by less than the stock market.
It’s a point echoed by Martin Bamford, managing director of Informed Choice, who says investing in defensive funds will limit your longer-term growth potential.
“While they should help to protect capital values and could even grow in value during periods of stock market rises, the return from bonds is traditionally close to cash returns,” he explains.
However, given the expectations of rising interest rates, Mr Bamford suggests that defensive funds, which are weighted towards gilt and investment-grade corporate bond holdings, are likely to get hammered by falling bond values.
“Cautious investors are limited in terms of the options they have right now, as cash is really the only safe haven, despite losing value in real terms due to sustained high price inflation,” he adds.
Adrian Lowcock, investment director at Architas, the multi-manager, suggests exposure to gold and government bonds makes sense, as these have a track record of success in protecting investors in a market downturn.
“Defensive funds tend to be less volatile and more risk averse than growth or more adventurous funds,” he explains. “Generally, they tend to be more cautiously managed and their focus can be on protecting capital, with capital appreciation a secondary ambition.”
He highlights the BlackRock Gold & General fund as one he particularly likes.
“The manager, Evy Hambro, has a preference for mature, high-quality businesses, which means the fund is well placed to protect investors from falls in gold prices and the share price of gold mining companies,” he says.
Fund to watch: Jupiter Distribution
This fund aims to provide a sustainable level of income and the prospect of long-term capital growth by investing in a balanced portfolio mainly of bonds, with some shares.
The fund can invest up to 35% in shares and the remainder in bonds, although the exact level of exposure can change to enable the managers to adapt to market conditions.
While the bond part of the portfolio is managed by Rhys Petheram, the shares element is run by Alastair Gunn.
Jupiter Distribution fund
Value of £100 invested in the fund over five years
| Year | 2013 | 2014 | 2015 | 2016 | 2017 |
|---|---|---|---|---|---|
| Price performance in year % | 9.05 | 6.8 | 4.39 | 7.46 | 4.68 |
| Value of £100* | £109.05 | £116.55 | £121.67 | £130.74 | £136.86 |
*The £100 was invested on 1 January 2013
Source: FE, 10 April 2018
| Managers | Alastair Gunn and Rhys Petheram |
| Launch date | 4 March 2002 |
| Total fund size | £996 million |
| Minimum initial investment | £500 |
| Minimum top-up investment | £250 |
| Intitial charge | 0% |
| Performance fee | None |
| Ongoing charge | 1.37% |
| Contact details | 0800 561 4000 |
Mr Petheram’s focus is typically on higher-quality bonds of well-managed companies that he considers represent good value for money as investments. He also holds some government bonds where he sees fit.
Mr Gunn, meanwhile, picks shares from businesses he perceives as having genuine potential for both capital growth and increasing the amount of profit returned to shareholders. He also picks businesses that can produce and sustain strong and growing cashflow.
Martin Bamford, managing director of Informed Choice, says the fund’s growth over the past five years has exceeded its sector average.
“It’s one of my preferred funds in this sector and for defensive investors who don’t want to select single-asset-class funds to populate an asset allocation model,” he adds.
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