• Gilts exposure remains essential portfolio insurance against equity market sell-off
• Absolute Return exposure complemented with additional defensive options
• Reduced international exposure, increased UK equity exposure

Funds that could help investors protect capital from unpredictable markets and increase portfolio diversification are the focus of the latest bi-annual FE Invest Approved List rebalance.

Rob Gleeson, Head of FE Fund Research said: “Our September rebalance took place in the aftermath of the UK’s decision to leave the EU. The subsequent six months have been no less dramatic, with the election of Donald Trump to the US presidency. With further significant elections on the horizon and a wave of populism sweeping across the West, 2017 could be just as dramatic, and that’s before we have even worked out what Brexit and a Trump presidency mean.

“In light of all this we believe that markets will be extremely difficult to predict and it is important that investors remain as diversified as possible in order not to be caught out.”

FE rebalances its list of preferred funds twice a year. Eight new funds join the list in March and 12 leave. Three of the new funds - Blackrock Absolute Return Bond, Premier Defensive Growth and Standard Life Short Duration Credit – have been added specifically for their low risk, low return profile. They replace Absolute Insight which has which has been low risk, but negative returns recently.

Gilts, specifically long duration, remain a significant part of the FE Invest Approved List because of their negative correlation to equities.

Gleeson comments: “While there is some capital risk posed by a sell-off in Gilts, this will likely be coupled with a rally in equities. Conversely, if equity markets sell-off, Gilts remain the best place to protect capital. We are not trying to call the direction of any single market. Gilts may go down, or go up over the next six months and either way, the FE Approved List has been selected to maximise the diversification benefit during portfolio construction.”

Despite continued uncertainty around the UK economy, the latest rebalance also includes a slight shift away from international equities into UK. This is to reflect the FE Research team’s view that with international equity valuations at a high, the UK is now a slightly more attractive prospect on a relative market basis.

Notable Funds Out

Liontrust UK Smaller Companies:

Thomas McMahon, Senior Analyst at FE said: “We have long admired this fund and its growth in assets under management is not only a tribute to the managers’ success but illustrates that many others share our view. We have, however, become concerned that the fund is now too large to be able to implement its strategy so are uncertain how it will perform in future. We see the significantly smaller Liontrust UK Micro Cap fund as better able to recreate the success of the Smaller Companies fund, which was built on investing in the lowest market cap companies early in their lives.”

Majedie UK Income:

Charles Younes, Research Manager at FE comments: “Following a difficult period around the Brexit vote, the manager has significantly changed the process of the fund to the extent that we believe our reasons for holding the fund are no longer valid. We have lost our conviction in the fund and there are strong alternatives in the UK Equity Income space.”

Notable Funds In

TB Amati UK Smaller Companies:

The fund has been on FE’s radar for a while having returned first quartile performance in the last three calendar years, earning it a maximum five FE Crown Rating. At a time when many smaller companies’ funds are becoming increasingly large, which is making it more and more difficult for them to follow their investment strategy, FE believes this fund remains small and nimble enough to be able to fully exploit opportunities available.

For a full list of funds joining and leaving the list this March, contact press@financialexpress.net