How to shield your wealth from the global sell-off

Professional investor Steve Waddington is a firm believer in a defensive investment strategy and likes sectors that do not depend on consumer spending to do well. Here, he picks three funds which he thinks are well-positioned to ride out the downturn.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Steve Waddington, director of investment selection at Insight Investment's multi-asset group.

As economies around the world contract, we expect sectors that do not depend on consumer spending and which provide protection in a downturn to do well. Utilities are the classic defensive choice at this stage in the cycle, with both demand and capital spending set to persist, regardless of the economy's strength. Within that broad definition, certain areas look particularly well positioned.

The alternative-energy sector stands to benefit in particular from Barack Obama's election to the US presidency. Faced with an energy crisis both in terms of the environmental impact and foreign-policy problems associated with fossil fuels, Obama plans to increase investment in alternative energy. A multi-billion-dollar, clean-technology, venture-capital fund is planned, and he also intends to raise $150bn over ten years from the auctioning of carbon pollution credits. He will use the money to fund initiatives to boost energy efficiency, new alternative energy sources and fuels and to revolutionise the US car industry. Our pick for this theme is the Impax Environmental Markets Fund (LSE:IEM). The fund invests in three areas: alternative energy and energy efficiency; water technologies and pollution control; and waste technology and resource management. It has a bias towards smaller, younger firms, but invests the majority of its assets in already-profitable businesses.

After another volatile month, the need for strategies that can benefit from market fluctuations has never been more apparent. The VIX index, which measures fear in the equity markets, hit a new all-time intra-day high of 81 in October. To put that in context, before the month began, the previous record was 46. While the concerted global bank bailout has averted total catastrophe so far, it is not a panacea further shocks to the system are nigh on inevitable and volatility may well spike again as more bad news emerges.

It is difficult to see any good news for stocks on the horizon. With a global recession ahead, there is no obvious catalyst for a sustained rally beyond a bear-market bounce. This makes market-neutral equity strategies particularly valuable. A market-neutral strategy can use relative value trades to generate returns it makes bets on how stocks will perform relative to each other, so can still make money when the overall market is falling. This is done by going long on favoured stocks and shorting overvalued or unattractive stocks. A number of these strategies have been launched in recent years aimed at retail investors. These funds operate within UCITS III guidelines, meaning that there are restrictions on leverage used and on the physical shorting of stocks. We like JP Morgan's JPM Highbridge Statistical Arbitrage Market Neutral Fund (www.jpmorganassetmanagement.lu).

We believe US small caps are overvalued. Small caps have been among the major beneficiaries of the liquidity-driven market rally of the past four years, dramatically outperforming their larger peers. Valuations look expensive and earnings forecasts too high. We have taken short exposure via the Proshares Ultrashort Russell 2000 ETF (US:TWM), which generates twice the inverse of the returns of the Russell 2000 Index of small caps. This is also an appropriate hedge against other equity exposure, and should help shield portfolios against a liquidity driven sell-off where correlations across asset classes increase.

Recommended

The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021
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

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021