Three funds for bonds, small caps and Asia

Markets will one day have to face up to the removal of government stimulus and the reduction of public debt. To safeguard your wealth, professional investor Steve Waddington believes you should diversify your investments. Here, he picks three funds that offer a good spread of assets.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Steve Waddington, co-manager of the Insight Investment Diversified range of funds.

Economic data and corporate profitability imply that the global recovery is gathering pace. This should support risk assets for now. But markets will have to face up to the removal of stimulus and governments cutting their debts. This may be a challenge for some asset classes. So we think investors should diversify their holdings across a range of asset classes. This allows you to benefit from gains if markets keep rising, but also means you are insulated to some extent from market falls. Three areas where our portfolios have core holdings are: convertible bonds, small-caps and Asian stocks.

One of our core themes is to reduce downside risk, while still reaping the rewards of risk assets continuing to do well. One asset class we like in this respect is convertible bonds. Convertible bonds can offer the upside potential of equities, combined with the downside risk protection of bonds, thereby delivering attractive risk-adjusted returns. Forced sales by hedge funds during the financial crisis meant that prices have been artificially depressed, creating an interesting investment opportunity. We have exposure to this through a holding in the M&G Global Convertibles Fund (020-7626 4588), which looks well placed to profit from current market conditions.

We also like smaller companies. In an improving economic environment, we'd expect small-caps to outperform larger companies. Also, they tend to be less well researched, which means they are more liable to be mispriced. So stocks with compelling balance sheet and cash flow positions can offer appealing upside potential. To play this, one vehicle we use is the Baring European Select Trust (0845 082 2479).

The fund manager focuses on smaller stocks and sees greater opportunities for growth within the sector. To cut the downside risk, we have isolated the expected outperformance from the fund, using derivatives to remove the directional risk from the European equity market. This means our investors stand to benefit from any outperformance from the active management, but are less exposed to potential losses if the stockmarket falls.

A final area we're looking to for growth is Asian equities. This is part of our theme of buying into investments that stand to benefit from long-term demographic change. Populations in Asia are very young, which means that regional economies stand to benefit as more and more people reach working age. The Asian population is also growing more rapidly than in many other regions.

Asian economic growth is, of course, currently higher than Western economic growth. Yet we believe that even after economic recovery is complete, the Western world will find itself being a lower-growth environment than it was before the financial crisis. This should make Asian growth look increasingly attractive in a relative sense, prompting more investors to move money from West to East.

One of the ways we are accessing the Asian growth opportunity is via the Schroder Asian Total Return Fund (0800-718777). One thing that makes this fund more attractive than many others is the fact that it can take short positions in regions that it views as being less attractive than others. This approach aims to provide the fund with better capital protection during sell-offs, but means individual holdings can take part fully in rallies. As such, we feel that this fund fits well in our multi-asset portfolios, offering upside exposures while keeping an eye on cutting downside risk.

Recommended

Four of the best funds for mining profits in gold
Gold

Four of the best funds for mining profits in gold

The gold-price upswing is set to endure, says Max King. These funds look the most promising.
13 Jan 2021
Venture capital trusts that offer growth, income and tax relief
Share tips

Venture capital trusts that offer growth, income and tax relief

Professional investor Alex Davies, founder of high-net-worth investment service Wealth Club, is a fan of venture capital trusts (VCTs). Here, he picks…
8 Jan 2021
I wish I knew what an investment trust was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an investment trust was, but I’m too embarrassed to ask

“Active” investment funds come in two main varieties, one of which is investment trusts. But what exactly is an investment trust?
5 Jan 2021
Six investment trusts to tuck away now – and six to sell
Investment trusts

Six investment trusts to tuck away now – and six to sell

Max King presents his round-up of the “lame ducks” of 2020 and highlights six “Cinderella” trusts: strong performers that have not received the recogn…
29 Dec 2020

Most Popular

A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Here’s why markets have shrugged off the US political turmoil
Investment strategy

Here’s why markets have shrugged off the US political turmoil

Despite all the current political shenanigans in the US, markets couldn’t seem to care less. John Stepek explains why, and what it means for your mone…
7 Jan 2021
Free 6 issue trial then continue to