Five funds to invest in during the recession

Linda J. Dodson

For those looking to protect their cash, there is no straightforward answer. Counter-intuitively, they should not immediately park their money in the most defensive fund they can find or retreat to a low-rate savings account.

Markets look ahead and will have priced in the recession before it began and start to recover long before the impact is truly felt, according to Darius McDermott of Chelsea Financial Services, a fund shop.

“A classic example of this was in March 2009. The British economy was in a big recession but it was also the best opportunity to invest for a generation – and the stock market did very well in the second half of 2009,” he said.

A stock market fund that invested in undervalued companies primed to rebound quickly might be the best option, he added.

They include the £750m Schroder Recovery and the £1.7bn Jupiter UK Special Situations.

These funds own beaten-up stocks in the banking and mining sectors which could bounce back once investors think that the bulk of the bad news for the economy has emerged.

For those who want to hedge their bets a little more, he suggested the £700m Evenlode Global Income fund. his offers geographical diversification and its managers prefer companies that lead their industries and have high barriers to entry in their sectors.

Its largest holdings include Unilever, the consumer goods giant, and Reckitt Benckiser, the household products firm. Both have excellent brands and should see strong sales even during a recession.

For pessimistic investors who expect more pain ahead, an infrastructure investment trust is a good option such as the £840m BBGI Sicav.

“Infrastructure companies are relatively unaffected by economic conditions and will perform well even in a recession and continue to pay dividends,” Luke Hyde-Smith of Waverton Investment Management said.

The fund has investments that operate in critical areas of the economy, such as schools, roads and prisons, which will be business as normal regardless of an economic downturn.

However, its share price trades at a 28pc premium to the value of its assets compared to an average of around 15pc for the past 12 months. This reflects the trust’s current popularity among investors. 

An even more defensive option would be the £640m M&G UK Inflation Linked Corporate Bond fund, Eduardo Sánchez of Square Mile, a fund research group, said.

It invests in bonds from companies that are unlikely to default, with interest payments linked to inflation, which adds another layer of protection for investors.

“If we have another spike of volatility and another market sell-off similar to the one in March, there will not be many places to hide. This is a unique fund that aims to protect capital value and income from inflation,” he added.

It also owns British government bonds, which are regarded as a safe haven when markets go south. The fund has been a top performer in its sector in the past five years whenever markets have crashed.

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