Darius McDermott: Funds to protect against the suspension of capitalism

No one knows how long imminent recession will last as governments intervene to address Covid-19 impact

I’ve seen quite a few things in my 25 years in financial services, but nothing compares to the speed at which the global economy has been brought to a standstill by the rapid spread of the coronavirus.

The past few weeks have been littered with opinions on what will happen both to the UK and the rest of global economy if this spread continues.

Last week’s news, that the UK government is stepping in to pay 80% of salaries for workers earning up to £2,500 a month, was a clear and unprecedented statement of just how real the threat is. In fact, I read one article which claimed capitalism has been suspended in the UK – it’s fair comment, with the majority of us working from home and some £4bn of cash likely to leave the Exchequer every quarter to pay those salaries and prop up many, many businesses*.

Are we heading for severe recession?

The question is how long will this last? In the past week I’ve listened to many asset managers, all with vastly different opinions. Some believe that there will be a six-month impact on earnings and that there are plenty of good franchises out there globally – alluding to a potential V-shaped recovery.

Others are less hopeful. Schroders chief economist Keith Wade believes we are set for a severe recession in the first half of the year which, even with a rebound in the second half, means 2020 is set to be the worst year for activity since the 1930s**. Schroders expects the world economy will contract this year by 3.1%, before rebounding by 7.2% in 2021. The numbers factor in the recent (and future) moves in monetary and fiscal policy globally.

Perhaps the most worrying opinion has come from the Organisation for Economic Co-operation and Development (OECD), after its secretary general, Angel Gurria, said he believes “the global economy will suffer for years to come” and warned the economic recovery will be shaped “like a ‘U’ with a long trench in the bottom, before it gets to the recovery period”***.

No definitive answers at this stage

My own view is that we can’t offer any definitive answers at this stage, and that is why the economy is so volatile. China is the only barometer we have and, while we have seen a move to back to normality there, we must consider the forceful steps it undertook to do so – if China says stay indoors, people stay indoors. I think a return to normality, including us all returning to our respective workplaces, is between three and six months away. The economic outlook is a different matter.

Keep in mind the Warren Buffett mantra

With the FTSE 100 down more than 30% since the start of the year^ (and possibly going lower), it’s hardly the ideal environment in which to invest, as we enter the final two weeks of the Isa season. My message would be that, while the market was expensive prior to the Covid-19 outbreak, there must be opportunities to invest in quality businesses in this environment.

I keep going back to the Warren Buffett mantra: “be fearful when others are greedy and greedy when others are fearful”. It’s an attitude which has historically rewarded investors. Over the past 50 years we’ve seen 10 market crashes. Interestingly, it has taken the market less than two years on average (648 days) to recoup those losses^^. Of course, every crisis is different – particularly this one – but history suggests investing now for the long term will pay off.

Funds that offer diversification and reliability

I would suggest investors look for funds which offer both diversification and reliability at this time – funds which invest in quality companies/brands have also held up well, while value businesses have been hammered by the downturn.

A natural choice would be to go down the multi-asset route, where funds look to offer different sources of returns. Options might include the likes of the Rathbone Strategic Growth Portfolio, which will include fixed income, equities, commodities and property, as well as alternative investment strategies in its holdings. Asset classes are then divided into three distinct categories – liquidity, equity risk and diversifiers. Other well diversified multi-asset funds worth considering include the Premier Diversified Growth fund and the Close Managed Income fund.

Another to consider is the Church House Tenax Absolute Return Strategies fund, a long-only multi-asset vehicle, which invests directly in assets, rather than using the ‘fund of fund’ route. The fund places capital preservation at the heart of its investment process.

As for the focus on quality businesses, the likes of Morgan Stanley Global Brands and the JOHCM Global Opportunities fund are both solid options. The latter is managed by Ben Leyland and Robert Lancastle and focuses on high quality, high return on capital businesses, with the managers not afraid to hold high allocations to cash if they feel it is appropriate.

*Source: Sky News: Coronavirus: Britain’s economic heart attack has suspended capitalism as we know it

**Source: Schroders: Coronavirus to spark “severe” global recession

***Source: BBC: Global economy will suffer for years to come, says OECD

^Source: FE Analytics, total returns in sterling from 1 January 2020 to 19 March 2020

^^Source: Refinitiv Data, using returns from the FTSE All Share index.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.