With all signs pointing to the fact that the UK is heading towards a recession and the Bank of England warning that it will be the worst economic shock for hundreds of years, now is a good time to revisit your investments. Markets have been on a rollercoaster ride over the past two months, so many investors are thinking about spring cleaning their portfolio to get it recession-ready.
While no-one should make drastic moves with their investments, a looming recession is a good time to revisit the basics, remind yourself why you’re investing and work out areas where your portfolio is lacking. While the last recession took five years for the economy to reach its pre-crisis levels, there is some hope that this one will be shorter – albeit sharper. Here are some key moves you can consider to get your portfolio recession-ready.
1. Spread your eggs around
The recent falls in equity markets have been a wake-up call for many investors that they had too much risk in their portfolio – and too many of their assets in the stock markets. Just 340 funds out of more than 4,000 have delivered a positive return so far this year, and a large chunk of the ones above water are bond funds, which highlights the importance of considering exposure to these assets in your portfolio.
Likewise, the worst performing funds have been focused on energy and certain emerging markets, as they are more exposed to falls in the oil price. This means if you had too much money invested in these areas you’d have faced a larger fall in your portfolio than if it had been spread around. Look at how much you have in each sector, asset class and country and assess whether you need to rebalance.
2. Check your concentration
It’s not just a spread between asset classes that you need to think about, but also making sure you don’t have too much money in a handful of companies. This is trickier if you invest in funds and investment trusts, as you need to make sure they don’t have too much overlap in their holdings.
For example, anyone with exposure to oil companies has been hit by the oil price war and subsequent plummeting oil price. This should be ok if you only have a small portion of your portfolio exposed to these companies, but if you discover that lots of your fund managers own these same stocks you’ll see a much bigger impact on your portfolio.
Monthly fund factsheets only usually have the top 10 holdings on them, but you can still check there isn’t too much crossover in your funds’ biggest positions. Annual reports on funds will have more details on full holdings, but will be more out of date as they are only published once a year.
3. Income investors – prepare for the drought
Lots of companies have cut or delayed their dividends this year, meaning that income investors are going to face a hit to the payouts they see – whether they invest directly in stocks or via funds. Some income fund managers have predicted income cuts of 40% or more. Investors don’t have many places to turn, as there aren’t obvious untapped sources of income elsewhere, so they may need to take more capital out of their portfolio if they’re reliant on the income.
Investment trusts could be a good option though, as they are allowed to build up reserves they can use to pay out future dividends to investors. You’ll need to check the reserve level, or ‘dividend cover’ that these trusts have to see how much they have in the pot available to supplement current income. What’s more, a number of these income-focused trusts have fallen to discounts during the market turmoil, meaning that new investors should get a decent yield on them.
4. Assess what you’re investing for
If you think markets are going to be rocky for a long time, you need to make sure you’re investing for the long term. If you know you’ll need access to the money in the next couple of years, for example for retirement or to buy a house, you should think about gradually de-risking your portfolio so you’re not exposed to swings in the market when you need the money. No-one wants to be a forced seller just after markets have fallen, but likewise no-one wants to have to delay big events like retirement or a house purchase because their investment pot has taken a big hit.
5. Check your cash
If you’re worried that your personal finances might be hit during a recession you need to make sure you have enough cash to hand. If your cash savings have dwindled recently then you might want to sell some investments to bolster it – assuming saving additional money out of your income isn’t an option.
You then need to think about the cash level you’re comfortable with in your portfolio – this will be different for everyone. Do you want to keep some cash on the side to take advantage of market falls, do you want to de-risk your portfolio by having a bit more cash than usual, or do you think markets will rebound and you want to reduce your cash to put it into market? There’s no right answer, but just make sure you’re not hoarding cash that’s earning no interest for no reason.
6. Invest in ‘recession-proof’ funds
Investors might want to shift some of their fund exposure to those managers whose investment styles could do well in a downturn, and help to protect their money during any falls. One option is the Personal Assets investment trust, run by Troy’s Sebastian Lyon. The £1.2bn trust invests in a range of assets including high-quality companies, short-dated government bonds, cash and gold. It currently has about a 20% of the portfolio in cash, another third in index-linked bonds and 9% in gold, meaning it is positioned defensively. Mr Lyon focuses on avoiding loss of capital, as well as giving an instantly diversified portfolio in just one holding. In the first three months of the year the trust lost 3.3%, while markets fell by far larger amounts.
Another option is Janus Henderson UK Absolute Return. This £1.6bn fund has held up well in recent market volatility and protected against losses – since the start of the year it has lost 0.9% when markets have fallen by much more. The fund aims to deliver a return above zero, typically over a 12-month period, and has managed to do so every year for the past 10 years. Managers Ben Wallace and Luke Newman have the ability to have a significant amount in cash, to protect against stock market falls, and to ‘short’ stocks to help when markets are falling. However, the compromise here is that it charges a performance fee of 20% and its annual costs are pricey, with an OCF of 1.05%.
For those who want to remain in equity markets, Evenlode Global Income could also work. The fund invests in around 40 large companies around the globe, offering some diversification between different countries and markets. The fund managers hunt out holdings that have low levels of debt, high profits and require less capital to operate than their competitors, meaning they should be better placed to survive a downturn. While 40% of the £600m fund is invested in US firms and another 23% in UK companies, there’s a spread across smaller European and Asian markets too.
These articles are for information purposes only and are not a personal recommendation or advice.
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