It feels like we are once again on the cusp of change in the markets. Whether that’s a shift in central bank policy, inflation easing or a major development with the Ukraine war, there are plenty of levers which could put stocks on the move – either up or down. The difficulty is knowing which way they will travel.

At this time of year, fund managers are under pressure to set out their stall for the coming 12 months. They need to reassure investors that their portfolio is optimally positioned to cope with whatever is thrown at the market.

Many will stick to their knitting and simply say existing holdings should withstand whatever happens. However, one manager sticks out for dividing their portfolio in three themes. They’re hedging their bets as to what might happen and effectively saying to investors their portfolio will be able to participate in whatever direction markets take.

If one theme takes off, what happens to the other two themes which aren’t in play? Will the manager cut them off quickly or keep them in case there’s another shift in the market soon after? That’s a difficult decision for the person in question, Thomas Moore from Abrdn Equity Income Trust (AEI).

His first bucket contains companies that he believes should be resilient or do well if inflation remains high for a while. Here, Moore has invested in the likes of Shell (SHEL) and NatWest (NWG), with the objective of achieving real growth in income.

The second part of the portfolio features stocks offering generous dividends, with high yields typically a sign that the market has priced in potential bad news. Relevant names in the portfolio include Legal & General (LGEN) and the aim is to achieve above-average income.

Finally, Moore has a pool of stocks that are deemed out of favour in the current environment but which, he believes, could deliver good operational progress in time. Sofa seller DFS (DFS) is one example of this theme.

Moore highlights research from Stifel which found that stock markets bottom out four months before the end of a recession. He says many people believe we’re already in recession and that it could be short-lived, potentially ending in March. On that basis, we’ve already seen the market bottom. If correct, it would suggest investors might favour the previously unloved stocks part of the portfolio and show less interest in some of the inflation winners found elsewhere.

The manager is faced with a difficult decision – go all-in on one area or hedge his bets by having his fingers in three pies. This situation is a good example of how investors need to think about their own strategy – do they spread their risks or have conviction in just one area?

Fund managers with concentrated portfolios will probably say the best returns come from having utmost conviction but they’ll suffer hard if they get it wrong.

Moore’s strategy might see him achieve smaller returns versus only being in the winning strategy, but his three-prong approach also means he is taking fewer risks. In the long term that is the better path for most retail investors to emulate.

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