2 fund ideas to survive a recession

Against a backdrop of rising inflation and falling consumer spending, the UK is forecast to enter a recession by the end of this year and remain that way throughout 2023.

Unemployment remains relatively low in the UK, but rising inflation is putting pressure on both households and businesses. Rising fuel and energy costs are one of the main culprits. This reduces how much consumers can spend on goods and services. Businesses are therefore forced to either take the pain and absorb costs, or raise prices which could impact consumer demand.

While the UK might be heading for a recession, this isn’t surprising news for investors. The market is already anticipating a recession and much of the bad news is already reflected in stock market prices.

Are bonds still the answer?

During the Covid-induced recession in 2020, and the global financial crisis of 2008-09, bond funds held up relatively well. Traditionally, bonds are considered a ‘haven’ during tougher times for the market.

However, investors should be mindful the environment we’re in now is different. In the previous two recessions, the Bank of England (BoE) slashed interest rates, making investments in bonds and the income they pay more attractive.

Fast forward to today and interest rates are increasing at a regular pace to try to curb inflation. This puts pressure on bonds and has seen their prices fall this year. While the interest they pay now looks more attractive, rising rates could put further pressure on bonds.

That said, if things get better, rather than worse, next year and the BoE puts the brakes on rising rates, this could put bond funds on a stronger footing.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice.

Balance is key – but where can investors get it?

While uncertainty persists, investors should think about maintaining balance in their portfolios. Multi-asset funds are a good way to spread risk. They offer diversification by investing across a variety of assets, sectors, and countries. Some explicitly aim to provide some shelter when markets are turbulent.

Dividend-paying funds can also prove valuable in tough times. Managers of these funds often aim to invest in companies they believe are resilient enough to carry on paying dividends or have a proven ability to survive an uncertain economic backdrop.

What sectors have performed the best in previous recessions?

The table below shows the ten best performing Investment Association sectors during the UK’s last three recessions*. Although, what’s done well in the past doesn’t mean they’ll do well again. As you can see from the table, sectors have performed differently in each scenario. This shows how important it is to have a diversified portfolio that invests in lots of different sectors.

Source: Lipper IM, 27/09/22. Past performance isn’t a guide to the future. *Note IA sectors have changed over time.

2 fund ideas

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio. Investments can fall as well as rise in value, so you could get back less than you put in.

Troy Trojan

With an expectation that markets will be volatile while there’s continued economic uncertainty, a total return fund like Troy Trojan could be a good choice.

It typically invests in a mix of investments including shares, bonds, commodities and currencies. This could help provide modest growth over the long term and help provide some shelter when stock markets fall.

While the fund contains a diverse range of investments, it’s concentrated. This means each investment can have a big impact on overall returns, but it can increase risk. The fund mainly invests in larger companies, but the manager also has the freedom to invest in higher-risk smaller companies.

The fund tries to experience less ups and downs than the broader global stock market or a portfolio that's mainly invested in shares. As a result, it could form the foundation of a broad portfolio, bring some stability to a more adventurous one, or provide some long-term growth potential to a more conservative portfolio. It’s unlikely to keep pace with a rapidly rising market though.

FIND OUT MORE ABOUT TROY TROJAN, INCLUDING CHARGES

TROY TROJAN KEY INVESTOR INFORMATION

Fidelity Global Dividend

The Fidelity Global Dividend fund aims to deliver long-term income and growth, with a focus on providing some shelter in weaker markets.

The manager’s unconstrained investment approach allows him to invest anywhere in the world. He tends to favour large companies from developed markets, but does have the ability to invest in higher-risk emerging markets. He won’t compromise on quality and is mindful of valuation – how much a company’s share price should be compared with its prospects.

The fund could provide international diversification to an income-focused investment portfolio and work well alongside ‘growth’ orientated funds.

There’s a broad range of themes in the fund with a focus on more defensive sectors like consumer staples and pharmaceuticals. The manager has the flexibility to invest in smaller companies, emerging markets, and use derivatives, which adds risk if used.

FIND OUT MORE ABOUT FIDELITY GLOBAL DIVIDEND, INCLUDING CHARGES

FIDELITY GLOBAL DIVIDEND KEY INVESTOR INFORMATION

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Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.