How to keep your nest egg safe in the storms ahead

WITH US-China trade wars raging and the prospect of a No Deal Brexit brewing, one thing is certain – the investment seas are going to be choppy in the months ahead.

It could be time to add some ballast to stabilise your portfolio, whatever your investment goals.

DESPERATELY SEEKING INCOME

ECONOMIC turmoil can take a serious toll on corporate profits – and lower profits mean companies have less to hand out to shareholders in the form of dividends, a potential disaster for anyone who depends on an equity portfolio for income.

One quick fix might be to add income-focused investment trusts to your holdings. Ryan Hughes, of fund platform AJ Bell, says: ‘ If companies are forced to cut dividends, it means lower income for shareholders and those invested in equity income unit trusts.

‘The advantage investment trusts have over unit trusts is that they are allowed to build up income reserves in years of strong dividend growth, which they can dip into when corporate profits are under pressure.’

Most equity income investment trusts routinely operate this practice and as a result have a long history of increasing annual dividends. They are often known as ‘dividend heroes’.

Hughes says: ‘Take City of London Investment Trust as an example. It has a remarkable 52-year history of increasing dividends from a portfolio of large UK equities. It is currently providing an income equivalent to 4.5 per cent a year, with the prospect of further growth on top.

‘It could prove an interesting way of navigating more difficult times while still delivering an attractive income.’

Juliet Schooling-Latter is research director at fund analyst FundCalibre. She is also a fan of the City of London Investment Trust. She says: ‘Manager Job Curtis has dipped into the income reserves seven times since he started managing the trust in 1991, thereby ensuring the trust’s dividend keeps increasing.’

Other investment trusts with strong dividend records include Bankers and Caledonia, providing annual income of 2.4 per cent and 2 per cent respectively.

Jason Hollands of wealth manager Tilney says those considering funds – rather than investment trusts–could look at Jupiter Income. This is largely invested in British blue chip companies, whose dividends are expected to be more resilient than those of less established firms.

An alternative is Even lo de Income, which invests in companies generating sufficient cash to pay healthy dividends.

CAUTIOUS INVESTORS PRESERVE VALUE

CAUTIOUS investors can be easily spooked when markets become volatile. Their number one goal should be to look at ways of preserving the value of their investments.

AJ Bell’s Hughes says: ‘Diversification across assets is important for this group of investors. Traditional ways of preserving value such as buying government bonds or gold are solid options, but the timing of these purchases needs to be right, or you can lose a lot of money.’

An alternative is to add a multiasset fund aiming to deliver longterm returns. Schooling-Latter at FundCalibre points to SVS Church House Tenax Absolute Return Strategies, which aims to preserve investors’ capital. She says: ‘ It launched just before the financial crisis took hold in 2008 and fell just 5 per cent when the UK stock market was down 40 per cent.’

Hughes likes Troy Trojan, managed by Sebastian Lyon. He says: ‘This fund aims to grow investors’ money in real terms over the long term, and importantly has a strong focus on not losing money.

The portfolio is currently spread across assets such as government bonds, cash and gold, as well as some high quality equities. It has a long track record and comes into its own when markets become difficult.’

Hollands at Tilney likes Personal Assets, also run by Lyon, adding: ‘It won’t blow the lights out in a bull market, but will provide a less volatile ride in tough times.’

GETTING BACK IN BALANCE

INVESTORS who already hold a good mix of assets in a portfolio need to ensure they keep them in good shape.

Hughes says: ‘After a strong run in stock markets, it is useful to rebalance a portfolio as it prompts you to take profits from winners and so stops it becoming too reliant on key investment themes.

‘ An unemotional approach can reduce risk and keep it in shape.’

He also says that investors should not be taken in by the ‘illusion of diversification’ – portfolios comprising lots of different holdings, but which are all similar in nature and so likely to be equally affected by the same market events.

Value investing, where fund managers invest in shares that are unloved by the market but have potential, is currently out of favour. Examples of value shares are Grafton, which distributes building materials, and Paragon Banking Group. Both are in sectors seen as vulnerable to the effects of Brexit.

Value funds, says Hughes, can bring diversification benefits to a portfolio, providing a more growth-orientated focus. He likes Schroder Global Recovery, which could be held alongside more successful funds such as Fundsmith Equity or Lindsell Train UK Equity.

FundCalibre’s Schooling-Latter says investors looking for extra ‘glue’ in their portfolio should consider the Jupiter Strategic Bond. She says: ‘The manager can invest in any type of fixed-income asset and changes the portfolio to suit different economic environments.’

Its top ten investments are predominantly in US or Australian government bonds.

BOLDLY GO... INTO EMERGING MARKETS

ADVENTUROUS investors may not worry about market volatility. It often provides them with buying opportunities when prices fall. But even adventurous types may turn apprehensive if they see their portfolios fall sharply in value.

Hughes says there are investment options that are adventurous, but will help protect a portfolio from the worst of any market falls. One option is an income-producing fund invested in Asia and emerging markets, where many companies have a strong dividend culture.

Jupiter Asian Income and JP Morgan Emerging Markets Income fit this bill, both providing annual income of more than 3.5 per cent.

Hughes explains: ‘Neither fund is immune from falls in stock markets, but their defensive nature should see them hold up better than other funds with the same geographic bent.’

Schooling-Latter suggests Stewart Investors Asia Pacific Leaders, a fund that invests in large and medium-sized established companies. She says: ‘It lags behind peers in strongly rising markets, but has a good track record of faring well when markets are falling. For example last year it returned 5.4 per cent while the average Asian equity fund fell nearly 10 per cent.’

Hollands says an option for bold fund buyers is investment trust JP Morgan Emerging Markets. This has significant exposure to the Indian stock market, unnerved in recent days by the decision of the Indian government to strip the state of Jammu and Kashmir of its autonomy.