Make these three swaps now, fund managers tell investors British stocks have fallen behind but are set to bounce back

Investors who hope to make money in 2021 will have to wade through a myriad of changes, from the latest developments in the pandemic to a new American president and Britain outside the European Union.

All this uncertainty means now may be the time to move away from expensive assets that have done well for many years into cheaper or more interesting alternatives. Telegraph Money looks at some of the changes that fund managers recommend investors make for the coming year.

TIME TO MOVE ON FROM TECH Investors have routinely called time on the bull run in expensive technology stocks and for most of the past decade they have been proved wrong.

However, this year is different, according to Robert Bowie of Aberdeen Standard Investments. He said investors in American passive funds would have heavy exposure to technology companies and advised them to switch.

“While index investing in America has done well, valuations of mega- cap technology stocks now look stretched,” he said.

The manager of the £16bn MyFolio Multi Manager range has been reducing his position in the £9.9bn Vanguard US Equity Index fund in favour of the £1.6bn Dodge & Cox US Stock portfolio.

This “value” fund buys cheap stocks in the hope they can rebound. It focuses on the largest American firms and Mr Bowie said the sectors it specialised in should perform well as the economy recovered from the pandemic.

Nick Watson of Janus Henderson, a rival firm, said global tracker funds also featured heavy holdings in technology companies because American stocks accounted for two thirds of the MSCI World index, a barometer for the global stock market.

Mr Watson suggested that savers switch to funds that invest in cheaper British stocks. A “traumatic” five years for the domestic stock market had left shares at attractive valuations and they should be expected to perform well in a global economic recovery, he said.

BOND ALTERNATIVES Bond yields – the income paid each year relative to the price of the bond – have been falling for decades and are now near historic lows after a strong rally in prices. But with little room for further capital gains and paltry yields on offer, investors should consider alternatives.

Kelly Prior of BMO Global Asset Management suggested that bond investors switch to real estate investment trusts, or Reits.

“We recently started to reduce our bond allocation but we have maintained our exposure to specialist Reits such as Supermarket Income,” she said. The £710m trust, which invests in supermarket properties, has an appealing 5.5pc dividend yield.

Mike Bell of JP Morgan Asset Management suggested investors consider funds with the ability to bet against, or “short”, stocks. The best of these funds used this capacity to protect investors as markets fell in early 2020 but did not lose out in the subsequent rally.

GOLD LOSES ITS LUSTRE One of the best-performing assets of 2020, gold has lost some of its shine after it hit a record high of more than $2,000 (£1,457) an ounce in August. It is traditionally used by investors as a safe haven when stock markets are falling or to protect against inflation.

Peter Sleep of Seven Investment Management said investors who wanted inflation protection should consider an inflation-linked bond fund. The Lyxor FTSE Actuaries UK Gilts Inflation-Linked ETF is a good low-cost option, as it costs only 0.07pc a year.

Conservative investors who wanted to guard against a future recession should stick to the best cash deposits available, Mr Sleep said.