‘Liberation Day’ is here, bringing a tidal wave of new tariffs. US president Donald Trump has issued reciprocal tariffs on most of the US's major trading partners, ranging from 34% on China (and more in some Asian countries) to a relatively light 10% on the UK.
Markets have generally not responded well, with most global stock markets opening in the red. For some experts, this new wave of tariffs was the start of a trade war.
Victoria Hasler, head of fund research at Hargreaves Lansdown, reminded investors that the best course of action is to “sit tight and ride out” short term volatility, but also noted there could be opportunities to get defensive now ahead of future uncertainty. Below she identified three defensive funds that “remain relevant and are in some ways more compelling” in this more unstable market.
Invesco Tactical Bond
Hasler said: “Bonds are as still as attractive as they were at the start of the year." Both 10-year gilts and US treasuries maintain yields above 4% and, while they could fall in the future, the Hargreaves team remains “bullish on bonds”.
“By looking at bonds now, there is potential for capital gains in the future, as well as being rewarded with inflation-beating income in the near term, and the potential to diversify portfolios.”
As a result, a fixed-income fund such as the Invesco Tactical Bond fund could be an attractive option. It aims to deliver a strong long-term total return through a combination of both capital growth and income. Over 10 years, it is up 30.3%, beating the IA Sterling Strategic bond sector average of 27.9%.
Performance of fund vs sector and benchmark over the past 10yrs
Source: FE Analytics
Manager Stuart Edwards and Julien Eberhardt aim to alter the funds’ investments based on their interpretations of the “bigger economic picture”, she said. In times of volatility, the managers will try to shelter the fund and seek stronger returns when more opportunities become available.
Because the managers have very little constraints on where they can invest, Hasler said it was a good choice for exposure to the wider bond market that “takes away the hassle of deciding what type of bond to invest in and when”.
Artemis US Smaller Companies
While tariffs will be challenging for many businesses, Hasler explained domestically driven smaller companies in the US had the potential to benefit. She pointed to the Artemis US Smaller Companies fund, led by veteran stockpicker Cormac Weldon, as a compelling option in this space.
Weldon and his team aim to identify the sectors that are benefitting and struggling from the economy's overall performance and adjust their strategy accordingly.
Over the past decade, it is the best-performing fund in the IA North American Smaller companies sector, up 179.7%, beating the Russell 2000 by more than 70 percentage points.
Performance of fund vs sector and benchmark over the past 10yrs
Source: FE Analytics
While it slipped into the bottom quartile over the past 12 months, Hasler said the manager's approach should allow it to “take advantage of new or changing policies that Trump puts in place”.
However, Hasler warned that US smaller companies were “not a trade for the faint-hearted” as they may be more susceptible to market volatility than their larger counterparts. Nevertheless, she concluded: “Once tariffs are in place, we think the more positive story could start to come through.”
Troy Trojan
Hasler identified the Troy Trojan fund, led by FE fundinfo Alpha manager Sebastian Lyon and co-manager Charlotte Yonge, as another compelling option given the current market volatility.
Hasler explained that the fund was a classic defensively minded portfolio that aims to steadily grow investors' money over the long term and limit losses when markets fall, rather than “trying to shoot the lights out”.
Over the past decade, it is up 66.5%, a third-quartile result, but has delivered a top-quartile return over the past 12 months.
Performance of fund vs sector and benchmark over the past 10yrs
Source: FE Analytics
Hasler explained this was because of the fund's significant gold allocation, “which has acted as a safe haven during times of uncertainty”. Indeed, the price of gold has surged to more than $3,000 this year, while gold funds were some of the best-performing strategies in the first quarter.
Additionally, the fund has other defensive allocations such as cash, index-linked bonds and established companies with sustainable earnings, which can provide further protection in challenging markets. As a result, the fund can “take advantage of the attributes of gold without putting all of their eggs in one basket”.