Add niche funds to weather 2017's potentially stormy stock markets

People who review their portfolios and invest money just once or twice a year are starting to think about what to do, and they are looking for guidance on the outlook for different asset classes over the next 12 months or so.

Some years are easier to predict than others, but generally successful prediction involves a lot of crystal ball gazing and an element of luck. The world proved unpredictable, to say the least, in 2016, and there’s so much uncertainty around it’s hard to feel strongly positive about any asset class as we head into 2017.

 

With a new US president due to be inaugurated, three big elections taking place in Europe, China continuing to slow, Asia Pacific trade agreements up in the air and the triggering of Article 50 on the horizon, general volatility is sure to continue.

Nonetheless, I am a firm believer in people saving regularly each year to make sure they are financially secure. At times like these, a reminder to focus on long-term thinking is never wasted. Here are a few ideas that might help you put your money to work.

I think we need to rethink diversification this year, and this is where some unusual investment ideas may come into play. Shares in companies from developed markets, which are already expensive in many areas, don’t offer much value. Investments in emerging markets could be hit by a strong dollar and interrupted trade. Bonds have already started losing money, and this may be exacerbated if inflation continues to rise. The oil price seems to be stuck, property is unlikely to offer much above low-single-digit returns and cash is basically paying zero.

 

So it may be worth adding a few satellite or niche investments to your portfolio. Infrastructure is widely anticipated to get a boost from Donald Trump’s presidency. The sector tends to be less volatile than the wider stock market, as many projects are government backed, and it pays a reasonable income. I like the First State Global Listed Infrastructure fund.

Insurance is another sector that weathers most economic storms. Some insurance cover is a legal obligation, so demand is steady. It’s another sector that can pay a reasonable level of income. My tip is Polar Capital Global Insurance fund.

When it comes to bonds, the two extreme ends of the asset class seem to be the most attractive. Those bonds with only a very short time until they mature will be less sensitive to interest rates, while the capital from maturing bonds can be reinvested in higher-yielding new issues. I like the AXA Sterling Credit Short Duration fund, where the manager does just this. Alternatively, a high yield on a bond may help dampen any price falls or inflation, in which case, my preferred fund is Aviva Investors High Yield Bond.

  • 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. Mr McDermott's views are his own and do not constitute financial advice.

 

Darius McDermott is the managing director of Chelsea Financial Services and FundCalibre.

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