Are global stock markets set for a difficult year?

The truth is that making short-term predictions about share prices is a fool’s errand, but anxiety amongst investors is on the increase. The US stock market has begun 2022 with several weeks of downwards drift; equity markets across Europe and Asia have followed a similar pattern. A sharp correction in the digital currency market has frayed nerves.

In which case, the minds of advisers and investors may be turning towards more defensive assets. And if the focus today is on staying rich rather than getting rich, the investment companies sector offers some interesting opportunities.

For one thing, investment companies are, almost without exception, actively managed funds. That is, managers pick and choose investments, rather than passively mirroring a particular stock market index, so that the fund tracks this benchmark’s performance. And while there are perfectly legitimate arguments to have about the respective merits of passive and active funds, the one thing we know for sure is that in a downturn, the former follow the market as it falls.

Another reason to consider investment companies during periods of market volatility is the greater choice they offer in terms of exposure to a broad range of asset classes. For investors who don’t want to hold all of their money in equities, the options with investment companies are wide-ranging. In particular, the way that investment companies are structured makes them ideal for exposure to less liquid asset classes such as property, infrastructure, credit and private equity, all of which may be attractive for investors looking for greater portfolio diversity right now.

Equally, while some investors will feel confident enough to make those choices for themselves, others may feel they are stepping out of their comfort zone when it comes to alternative asset classes. Or they may simply be wary of making difficult decisions about how much of their portfolio to leave invested in equities.

For this group, the Flexible Investment sector of the investment companies industry may be a good option. This sector now numbers more than 20 funds, each of which has the freedom to invest across a spread of asset classes as the manager sees fit; in other words, these funds offer a one-stop-shop for portfolio diversification, rather than requiring investors to take a DIY approach.

Funds such as Capital Gearing, Personal Assets and RIT Capital Partners have an excellent long-term record of wealth preservation. They have often been able to avoid losses during periods of equity market sell-offs – or at least to protect investors from the worst of those losses.

Personal Assets is a good example. It currently holds just a third of its assets in equities, with generous chunks of assets such as government bonds that provide comfort for nervous shareholders. Capital Gearing, meanwhile, currently has more than a fifth of its investments in property; it can also invest in derivatives such as warrants and options, which offer opportunities to profit from falling markets.

There are, of course, no certainties with these funds. And investors taking a more cautious approach have to at least consider opportunity cost – the potential to miss out on gains from funds that invest more aggressively.

Still, if you’re concerned about the direction global stock markets may take this year, it is worth knowing that the investment companies sector offers a number of possibilities for mitigating risk. These are certainly more alluring than simply moving into cash, where low interest rates mean your money will definitely fall in value in real terms, given where inflation currently stands.