Markets are uncertain. Should investors resign themselves to an inevitable fall?
A few short weeks ago, the FTSE stood at over 5,800. Now, it's bumping along at around 5,100 -- a fall of 12% or so.
Worse, it's by no means clear that this is the bottom of the dip. In the short to medium term, for instance, a fall to 4,800 or so seems eminently possible, based purely on poor sentiment. Factor in any worsening of the economic recovery, and it could well go lower. Much lower.
America, too, provides cause for concern. And a falling S&P 500 or Dow Jones usually drags London down with it -- at least to some extent.
In short, the topic of protecting one's wealth could hardly be more timely.
But how?
The trouble is, it's easier said than done. With interest rates at an all-time low, this is hardly the time to switch into fixed-income bonds and gilts: their prices, I suspect, are set for an inevitable decline as interest rates rise. Even more so if inflation picks up.
Property? Er, no thanks. I don't know about you, but my personal bet on Britain's property market is quite large enough, thank you, as a proportion of my overall assets. Nor am I tempted by gold, fine wines, antiques and vintage cars.
Which leaves cash. Switching shares into cash is perhaps the easiest defensive switch of all -- just sell, and don't buy any more -- but still leaves hanging in the air the difficult question of timing. Meanwhile, of course, your cash is earning a derisory return, with interest rates at an all-time low.
And in any case, trying to time a market's low point and high point is a mug's game. It's certainly possible to make some broad calls -- especially when it comes to selling -- but picking the right time to get back in is very difficult indeed. Many, many investors missed the bull run that began in March 2009, for instance.
Limited choices
Over the years, various solutions have emerged. Pension savers, for example, can opt for 'life style' investing profiles: risky, high-gain funds while they are younger, which are replaced by safe-but-solid picks as they move closer to retirement. With a bit of research, you can do much the same thing in a SIPP.
Diversification offers another solution -- but as I've said, with bonds, gilts and gold looking ripe for a fall in price, I wouldn't start from here.
Defensive stocks are still another option. When the FTSE fell by 45% in the period from June 2007 to March 2009, defensive shares suffered falls of rather less than that. The price of stocks such as Tesco (LSE: TSCO) and GlaxoSmithKline (LSE: GSK) certainly fell, to be sure, but not by the full 45%.
Investment funds, too, can offer protection. But a lot, here, is down to the stance of individual fund managers, and how willing they are to make bets on the future direction of the market. Yet some managers have a good track record in doing just that: investing legend Ian Rushbrook, for instance, was famously defensive when running Personal Assets Trust (LSE: PNL) -- yet still managed to routinely beat the FTSE.
More recently, Absolute Return funds aim to profit from both market falls and market upswings, often using fancy financial instruments to achieve this. On the downside, they've not been around very long. Certainly, I have none of my own personal wealth invested in any of them.
Enter Fidelity
With all this in mind, I was interested to see that investment giant Fidelity is launching a new fund on 13 September -- a fund aimed at protecting investors from market dips.
Its brief is to offer investors equity growth, while aiming to defend both their capital and growth from the full impact of market declines. As the firm itself puts it:
"No matter the stage of the market cycle, investors can put their money into the equity market knowing that they will benefit from market rises, and that any gains should be protected and losses tempered during market downturns."
And as far as I can see, the fund -- termed the Fidelity Equity Growth Defender Fund -- has quite a few attractions.
Unlike Absolute Return funds, for instance, it's fairly transparent, employing a conventional OEIC structure which doesn't use complex financial instruments, and is priced daily. The equities it will invest in are predominantly UK equities, although 20% of the fund can be in foreign stocks.
And charges, too, are relatively modest as these things go -- a TER 1.46%, which would appear to be worth paying if the fund actually delivers on its promise.
But will it?
The Fidelity Equity Growth Defender Fund will be invested 100% in equities at launch. The key driver of performance will be the mix of equities and cash which will then be reviewed on a daily basis.
When the fund price moves up, driven by higher equity markets and good stock selection, the fund's equity exposure will be increased. When the fund price falls, the fund's equity exposure is reduced and cash increased.
So when equities are rising the fund will have more in equities, and when the market is falling the equity content will be less. This systematic allocation is designed to ensure the fund's price should never fall below 80% of the fund's highest ever price -- which is a much better proposition than the 45% fall in the FTSE during the crash.
A chart from Fidelity illustrates the idea. If an investor buys the fund at a price of 100 at launch, they can expect the future fund price not to fall below 80. This is the level of 'expected protection,' as the firm calls it.
If the fund price rises to 133, then the level of protection increases to 106 (80% of 133) regardless of whether the investor entered the fund at launch. If the fund price subsequently falls, the level of expected protection should not fall below 106.
On the downside, investors must recognize that there will be times when their exposure to equities will be less than 100% -- so they'll miss out, to some extent, when markets are soaring. Equally, their returns from cash will be constrained by prevailing interest rates.
Is it a buy?
I certainly think there's a market for this kind of product, especially among older investors nearing retirement. And so does Fidelity.
"It may be attractive to investors who wish to put money into the equity market but are understandably nervous of doing so, and particularly those pre‑retirees who want to maintain their equity exposure for longer but who cannot afford serious investment losses on their portfolios such as those seen in the recent financial crisis," says Fidelity's Peter Hicks, the firm's product director for UK equities.
"Making up lost ground when equities have fallen can take many years – sometimes longer than an investor can spare if they are approaching retirement. Building long term wealth accumulation is as much about managing risk for these types of investors as it is about capital growth and we believe this new product will fulfil both needs."
In short, it's a fund that I'll follow with interest. The key question: when buying protection, how much of the market's upside are investors foregoing? When it's built up something of a track record, I'll report back.
More from Malcolm Wheatley:
> Malcolm owns shares in Tesco and GlaxoSmithKline.
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