How to shield your wealth from the global sell-off

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.

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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.