Investing in a recession

How should investors respond to news that the UK has slipped into recession? Well, the first point to make is that financial markets don’t always behave as you might expect – the UK stock market, for example, actually rose on Thursday despite the announcement first thing of a second consecutive quarter of negative economic growth. There is certainly no need to panic.

Moreover, remember that economic data, by definition, is backward looking. The latest growth figures from the Office for National Statistics tells us about what happened between July and December last year. There is no insight here into what’s happening right now – let alone what the next few months have in store.

Nevertheless, the macroeconomic backdrop continues to feel uncomfortable. It’s not only the UK that is struggling – European Union countries including Germany have also been flirting with recession and the European Commission this week cut its growth forecasts for 2024. Japan, too, has slipped into downturn territory. Even in emerging markets, where growth rates are often much higher, the news is not encouraging; all-important China, in particular, continues to falter.

Indeed, looking around the world, only the US provides some light amid the gloom, with growth last year that was well ahead of expectations. Still, it must steer a course between managing inflation and protecting the economy – plus, in an election year, political uncertainty continues to mount.

All of which should give investors pause for thought. Do they need to take a more defensive approach with at least part of their portfolios?

One potential solution in these highly unpredictable market conditions is to outsource your asset allocation decisions. With most collective investment funds, that isn’t possible since they invite you to back a particular asset class or market – you pick a vehicle that holds US equities, say, or European commercial property fund. However, the Flexible Investment sector of the investment companies industry is a little different.

These are funds where the managers have a very broad remit about how they invest your money. They’re not required to stick to any one asset class; instead, they put shareholders’ cash into the asset classes they feel are most appropriate at a given moment. When they’re pessimistic about the investment outlook, they can take a more cautious view, increasing allocations to assets such as fixed-income securities, real estate and even cash. At other times, they may increase their weightings to equity markets.

Similarly, most Flexible Investment funds are not constrained by geographical mandates. They can move money from one country to another, depending on where they think investors need protecting and where the best opportunities lie.

In many cases, these investment companies have a focus on capital preservation; that is, their overriding priority is to avoid negative returns. That doesn’t mean you’re guaranteed to stay in positive territory – no fund that invests in assets that can fall in value as well as rise can make any promises – but a capital preservation tilt can provide comfort.

As in any funds sector, investors will need to do their due diligence. Flexible investment funds come in different shapes and sizes. Some, for example, are explicit about the fact they invest more aggressively. For others, caution is paramount.

The biggest funds in this sector include stalwarts such as Caledonia Investments, Capital Gearing, Personal Assets, RIT Capital Partners and Ruffer, all of which are managing assets worth more than £1bn. Size isn’t everything, of course, but you can be confident these funds are large enough to build very diversified portfolios – and that there will be plenty of liquidity when you come to buy and sell shares.

Flexible investment funds aren’t just for troubled times. Many investors regard them as a good base holding for their portfolios – they can then add more specialist exposure through focused funds, as they see fit. Still, at times such as now, when recession is causing anxiety, this is a sector that’s worth thinking about.