Twelve funds to ride the recovery

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Charles MacKinnon, CIO, Thurleigh Investment Managers.

It's particularly hard for investors to work out where the economy is heading at the moment. Investors need to decide whether the future is one of inflation, deflation or normal growth.

The credit boom of the last decade is now being unwound with profoundly deflationary consequences. Governments around the world are busy pumping credit into their economies to slow the decline. Historically, this 'reflation' has always led to growth, which has in turn led to wage and price inflation.

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We don't think inflation is currently a risk because demand destruction has been much larger than the loss of capacity. We also do not think that the demand destruction, while huge, is sufficient to drive the world economy into a deep and prolonged recession. So, how do we, as investors, seek to preserve and grow capital over the next few years?

If the world is going to continue growing then it will consume commodities. This means both the big things, like oil and grains, but also little things, such as platinum and rare earths. Demand growth over multi-year periods for commodities is remarkably stable, but investors get mesmerised by short-term fluctuations. We use three funds to access commodity markets Guinness Global Energy (020-7222 5703), Schroders Alternative Solutions [pdf] (020-7658 6000) and Investec Natural Resources (020-7597 2000).

We think it is important to give skilled managers in this area as broad a remit as possible because there is significant money to be made from the continuing short-term volatility. Our portfolios contain between 2% and 10% in commodities at present.

We have also recently allocated 10%-40% of capital to various types of corporate debt. There are three distinct types here. Firstly, investment grade debt the bonds of corporations (Vodafone, British Gas, Roche, France Telecom) that have been around for a while and most of which we are confident will pay coupons and repay principal. Secondly, high-yield debt the bonds of companies that are in serious financial difficulty. And thirdly, toxic waste these are products that are the leftovers of the last 20 years of credit expansion, such as MBS, CMBS, RMBS, CDOs, CLOs, and so on.

Corporate debt is subject to a tug of war governments want to keep interest rates down to avoid recession, making these (relatively) high-yielding assets attractive. However, there is the very real fear that many of these issuers will fail to pay their interest and repay your capital. So, just as with commodities, we think it's vital to allocate your capital to skilled managers with very deep pockets. We mainly use Pimco, which, with $756bn under management, has depth and breadth.

We use their Global High-Yield Corporate Bond Fund and Global Investment Grade Fund (020-7 872 1300) as well as Bill Gross's total return fund to access all the toxic waste. We also have significant investments with M&G Strategic Corporate Bond Fund (0800-389-8600) and Invesco's Fixed-Income Fund (0800-085 8677).

Conventional equities make up 20%-40% of our portfolios. We mainly use index funds and have over the years come to realise that the fewer the better. We prefer four: the iShares FTSE 100 ETF (LSE:ISF), S&P 500 ETF (LSE: IUSA), Emerging Markets ETF (LSE: IEEM) and the MSCI World ETF (LSE: IWRD).

In conclusion, we think the economy will wobble and we will muddle through. It will continue to be painful and volatile, but you need to be invested now to protect and preserve your capital.