David Stevenson: Defence is the best form of attack in nervous markets

Traditional multi-asset trusts have been a mixed bag since the start of the Ukraine war unleashed further volatility, but the case for delving into defensive infrastructure funds is clear.
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That was an exciting couple of months in February and March, wasn’t it! I won’t dwell on why I think the recent selloff and subsequent bounce are a distraction from a more structural bearish story, but let’s just observe that from a recent peak on 10 February, the FTSE All Share index fell over 10% until it hit a near-term trough on 7 March. Since then, it’s recovered nearly all those losses and rose just over 8% by the end of last week.

I think the recent rally is built on almost entirely false foundations but maybe I’m wrong. A more mainstream position is that we could be in for more choppy and turbulent markets in 2022, with more twists and turns in the next few months. That makes this the perfect environment for a gaggle of investment trusts which are worth focusing on as a defensive shortlist for nervous investors.

In the table below I’ve listed two broad groups of funds. The first is a handful of multi-asset funds featuring well known names such as Capital Gearing (CGT ) and Personal Assets (PNL ) promising a defensive mix of quality equities and safer bonds.

The second comprises infrastructure funds, ranging from long established generalist names like International Public Partnerships (INPP ) and HICL Infrastructure (HICL ), through to specialists like SDCL Energy Efficiency Income (SEIT ), which has just raised another £100m in a recent placing with institutional investors. I’ve also included the longest established infrastructure fund of funds from Gravis, which invests in these and other names in the sector.

My shortlist is echoed in another report by the well-respected funds research team at Investec led by Alan Brierley. Their shortlist includes BH Macro (BHMG ), Capital Gearing, Ruffer Investment Company (RICA ), RIT Capital Partners (RCP ), and Personal Assets, but also adds infrastructure fund JPMorgan Global Core Real Assets (JARA ) and private credit and equity fund Aberdeen Diversified Income and Growth (ADIG ). I like both the latter funds, but I think the JP Morgan trust is too young to make my list while the Aberdeen fund, which shifted its approach late in 2020, is just too private-equity-focused for my defensive liking.

Defensive funds: How have they done?

Fund Ticker Market capitalisation (£m) Change in price 10/2/22 to 7/3/22 (%) Change in price 7/3/22 to 25/3/22 (%) Five-year total return (%)
Defensive multi asset funds          
Capital Gearing  CGT 1053 0.2 2.0 36.4
Personal Assets  PNL 1810 -0.2 2.2 30.8
Ruffer Investment Company  RICA 859 -1.9 2.8 31.8
BH Macro  BHMG 1160 -2.1 7.3 70.9
RIT Capital Partners  RCP 3946 -11.0 7.5 64.4
Infrastructure funds          
SDCL Energy Efficiency Income  SEIT 1055 0.4 1.7  
VT Gravis UK Infrastructure Income   Oen-ended fund   -1.4   34.6
International Public Partnership  INPP 2895 -3.5 6.4 32.2
HICL Infrastructure  HICL 3303 -4.2 2.2 36.7
Benchmarks          
Gold Composite     8.6   57.4
FTSE All-Share     -10.1 8.4 25
S&P 500     -6.7 8.1 100.9

Sources: SharePad, Morningstar

So how did my shortlist of defensive funds perform over the last two months? I’ve broken down returns into two columns. The first is the selloff phase from the recent peak on 10 February to the recent trough on 7 March. Second, comes the rebound phase running to close of trading on 25 March. For reference, I’ve also included three benchmarks: the FTSE All Share, S&P 500 and the gold price.

The results are illuminating. Among the classic defensive equity and bond vehicles Capital Gearing has had the best crisis with a small gain for its shares during the initial selloff, closely followed by Personal Assets, which registered a tiny loss. The Ruffer Investment Company is not too far behind with a 1.9% loss. I found the returns from listed hedge fund BH Macro – which I am personally invested in – a little underwhelming at a loss of 2.1%

The biggest surprise was the RIT Capital’s loss of 11%, well in excess of the FTSE All Share’s decline and just a smidgeon above that of the S&P 500. This backs up a contention I have long had which is that RIT, though a fantastic long-term investment, is also a good deal more volatile and less defensive than its proponents maintain. That doesn’t make it a bad option – quite the opposite, in my view – but I’m increasingly reluctant about regarding it as a defensive fund.

Overall, the winner of this first phase was SDCL Energy Efficiency which increased by 0.4% over that time. I watch the share price of this fund carefully and regard it as an increasingly interesting defensive stock. That shouldn’t come as a surprise as its underlying strategy is about as boring as you can imagine – investing in stuff such as energy-saving light bulbs or combined heat and power projects involving big industrial plants or data centres. The fund has marketed itself as a steady-Eddie income play and, so far, that’s what it has provided to investors.

The more ’traditional’ infrastructure players HICL and INPP, I think, provided relatively disappointing returns of -4% and -3.5% respectively. I’d have expected their share prices to move around a good deal less because of their core infrastructure assets. But perhaps these bigger- than-expected moves remind us that both of these funds are increasingly heavily exposed to assets that are impacted by wider macroeconomic cycles.

My last observation on this selloff phase is that gold outperformed, up over 8%, as we would expect. Gold is a classic geopolitical hedge, although its performance record in inflationary environments is not quite as clear cut as its proponents make out. Still, gold indisputably proved its value as a hedge in the recent selloff.

And what of the rebound? Pleasingly all the funds in the table have increased in value. As you’d expect, RIT increased by 7.5% through to last Friday. More surprisingly, BH Macro has also bounced back aggressively, which makes me a tad wary.

Stepping back from the ups and downs I think a defensive investor might consider the following takeaways. Classic defensive funds like Capital Gearing, Personal Assets, Ruffer, and to a lesser degree BH Macro, have done what they say on the tin. But the cautious should also consider adding some diversified infrastructure sector exposure, plus some specific names like SDCL. By contrast, if you are a very defensive investor, worried about markets and volatility, I’d be a lot more wary of RIT Capital Partners, as well as the traditional core infrastructure funds.

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