An investors' survival guide

As the spectre of a double-dip recession looms, where can you safely put your money? Or – maybe – even make it grow? Julian Knight investigates

(AFP / GETTY IMAGES )

To say the performance of the British economy in the final quarter of 2009 was a disappointment is putting it mildly.

The Office for National Statistics announced that between October and December the economy grew by a tiny 0.1 per cent, crucially well within the ONS's margin of error. In other words, when the final results for the economy are totted up in the coming weeks, it's possible that Britain will still be the only member of the G20 group of the world's biggest economies to remain in recession. As far as the economy is concerned, we've rarely had it so bad.

Unsurprisingly, the moribund growth figures sparked another round of sterling sales and stockmarket jitters as it seems that the prospects for the rest of 2010 – and 2011, for that matter – are bleak indeed. In fact, an increasing number of analysts and economists expect the UK to suffer a dreaded "double-dip" recession. Put simply, this means the economy could be in for another contraction later this year or beyond, particularly if public spending is cut and taxes raised post-election to persuade those investors who buy the British government's seemingly ever-expanding debt that we are serious about getting public finances under control.

But outside the obvious concerns for jobs, mortgages and the prices of goods and services, what does this doom-laden economic news mean for those who want to invest for their future? How can you, as a private investor, protect yourself against the fall-out from a double-dip recession, or a slower-than-expected return to healthier levels of economic growth? And, finally, where should you be investing right now to secure what you already have, and maybe – just maybe – enjoy a little investment growth?

"The economy potentially is in very serious trouble. It could pay right now to adopt a cautious approach to investment," says Darius McDermott from independent financial advice firm Chelsea Financial Services. "The past year has been an excellent one for investors in the stockmarket; they have seen growth of 30, 40 and even 50 per cent, but although there may be some more upside I am worried that the market is sensitive to what it sees as bad news – such as worries over inflation in China, or Obama's proposed reform of the banks. There is a lot to be concerned about in the near term."

Ruth Whitehead of IFA firm Ruth Whitehead Associates in London has specific worries for the UK post-election, particularly if the Conservatives win. "I really fear the Tories will cut public spending far too soon, which will kill the economy stone dead," she says. "The recovery is delicate and it could be destroyed by the wrong fiscal policy move."

As a result, Ms Whitehead says she is in "covering-my-back investment mode". But this doesn't mean avoiding, say, investment in funds. She adds: "Look for a fund managed by someone with a long track record in the good and bad times for the economy."

Of the UK equity income fund sector – where managers tend to invest in the shares of large firms to scoop the – hopefully – regular dividend payments, Ms Whitehead says: "The manager who stands out in the equity income sector is Neil Woodford of Invesco Perpetual. He has managed the fund for best part of two decades, and has seen it all. His investment philosophy is right for uncertain times."

Adrian Lowcock of IFA firm Bestinvest is also keen on equity income funds. "I like Adrian Frost's Artemis Income Fund and the Standard Life Equity High Income fund managed by Karen Robertson. They are both good performers, as are special situation funds which look to invest in companies which the manager believes are undervalued, where, for example, the management is going through a restructuring of the business. In the special-situations sector there is the giant Fidelity fund managed by Sanjeev Shah, and Blackrock's fund."

Mr McDermott, on the other hand, is tempted by the new breed of absolute return funds. As the name suggests, these try to produce a positive return even when the stockmarket is falling. They can do this because managers are free to invest in a cluster of assets from property to cash accounts, bonds and currency, as well as equities. In addition, managers can use investment tactics more associated with hedge funds, such as betting that a company's share price will fall rather than rise. The idea is to produce smooth, consistent returns.

"These funds are designed to make money regardless of the market, and some aren't even invested in shares. The bottom line is these funds should produce growth at least 3 per cent above what is available on a cash savings account," Mr McDermott says. As for fund choice, he plumps for Philip Gibbs's newly launched Jupiter Absolute Return Fund: "[Philip Gibbs] has a proven record managing a hedge fund and he is rightfully nervous about markets and the danger of a double- dip recession in the UK. I also like the Gartmore UK Absolute fund run by Ben Wallace. In 2008, his hedge fund made 20 per cent when the market as a whole tanked."

But Tony Byrne, a certified financial planner who runs Milton Keynes-based Wealth & Tax Management, advises ignoring the hype and taking a more scientific approach to fund selection. "I don't go in for fund concepts. Every couple of years the financial services industry claims to have reinvented the wheel, to be able to deliver smooth, regular returns, and they are invariably shown to be nothing more than hype. In fact, I'd go further and say if you see lots of marketing around a new type of fund and lots of investors piling in then avoid it.

"I have a much more methodical way of selecting funds. Basically, only look at managers who have performed well over one and three years, and exclude those funds which are higher-risk and are therefore more volatile. This will leave you with a surprisingly small number of funds. Then match up your own attitude for risk with the geographical focus of the fund. So, for example, if you're younger and don't mind a little risk, have a bit of cash in emerging markets," Mr Byrne said.

What's more, he recommends, in this uncertain time, that investors keep an eagle eye on their holdings. "We review our clients' portfolios every quarter and if we think that they have too many higher-risk holdings, such as funds, then we will move money out of these into cash and bonds. The idea is to keep a balance of assets, including funds, cash and bonds. If one investment doesn't do so well, another will make up for it."

But, strangely enough, the undoubted problems of the UK economy may not necessarily lead to a falling FTSE. Mr Lowcock says: "Remember, the UK stockmarket is global in its outlook. Some two-thirds of firms in the FTSE 100 derive their revenues from abroad, many in the emerging markets, so, for them, problems in the UK are less important."

Nevertheless, buying a fund which simply tracks the FTSE may not be a bright investment play against the current economic backdrop. Mr Lowcock adds: "Stock selection is key in this market. For example, looking at those firms which benefit most from continued growth in the Far East, and in commodity and raw material prices. It takes a fund manager making everyday decisions – rather than simply buying an index-tracking fund which gives you exposure to everything."

And those brave enough, with a long-term investment time frame, could be well served from looking to the emerging markets for benefits of growth hard to come by at home. Ms Whitehead says: "The China story still holds a lot of interest for me. Perhaps it's partly gut instinct, but an economy growing at 10 per cent a year is just bound long term to be a good bet for investors."