‘Can Fundsmith protect me from a market crash?’

DIY investors are flying high as global markets trade at close to record levels. But lofty valuations and rising inflation are leading some to worry a correction is on the cards.

Steve Hammett, a 48-year- old finance manager from Coventry, is one such investor. Rallying markets had lifted the value of his Sipp but four months ago he changed investment strategy.

“Most of my portfolio was held in funds that buy shares,” he said. “But then I started worrying about inflation and money printing, and valuations going through the roof because interest rates are so low.”

Mr Hammett’s plan now is to invest 30pc in what he considers “low volatility” bond funds and 60pc in “high volatility” funds, which buy shares, together with a small portion devoted to stocks that pay a chunky dividend.

He hopes to move into semi-retirement in 10 years, at which point he would like to withdraw between £20,00 and £25,000 a year from his Sipp.

“I’ll continue to work parttime, either bookkeeping or opening a small business. I want to do something different, maybe open a small café,” he said.

“But that means I don’t want to invest too timidly. I want my portfolio to grow – but I am still concerned about a market bubble bursting.”

Paul Surguy

Head of investment management at Kingswood Bearing in mind Mr Hammett’s retirement goals, it seems he has organised his portfolio appropriately, with 70pc held in riskier investments and the remainder in safer assets.

However, I do have some concerns. Three funds – Ninety One Diversified Income, Fundsmith Equity and Baillie Gifford Japanese – account for 60pc of the portfolio, which is too much. They are all solid funds but by holding so much money with them, Mr Hammett is tying the fortunes of his portfolio too closely to their performance.

While he holds some funds investing in American shares, his portfolio also holds much less in these companies than the 68pc of the global stock market they represent. He should spread his pension money across more funds and bring his portfolio more closely in line with the makeup of global markets.

The same applies to the “low volatility” portion of Mr Hammett’s pension, made up of Ninety One Diversified Income, Artemis US Absolute Return and TwentyFour Corporate Bond.

A good addition to these three funds would be JP Morgan Global Macro Opportunities, whose managers have a good track record of making money when markets are falling as well as when they are rising. Over the past five years, the £2.2bn fund has delivered 35pc.

Mr Hammett should also consider the BNY Mellon Global Dynamic Bond fund, whose managers have the flexibility to invest in whichever bonds they see fit across the global market.

Rory Maguire Managing director at Fundhouse

I agree with Mr Hammett that markets look pricey. Like him, I think a correction is likely, especially for the most expensive areas of the market, such as American shares.

However, given his concern, I would pick different funds. Fundsmith Equity, his second largest position, is invested heavily in American companies, which account for 73pc of the fund. An alternative is Schroder Global Recovery, which holds fewer expensive US companies and spreads its money more evenly between different markets.

The Schroder fund is focused on “value” shares, so would be better protected if a market correction hit the most expensive areas of the American stock market hardest. I would also question Ninety One Diversified Income’s place in the “low volatility” section of the portfolio. While the bulk of the fund is held in bonds, which are traditionally safer than shares, a large portion is invested in riskier areas of the market, such as emerging market and high-yield corporate bonds. That explains the fund’s relatively high 3.8pc yield.

I recommend Mr Hammett halve his stake in the Ninety One fund and replace the TwentyFour Corporate Bond fund with the Axa US Short Duration High Yield fund, which buys bonds that need to be repaid over shorter time periods. This will cut the portfolio’s income but also reduce risk.