Fund Picks To Survive A Recession

Published on
  • The UK is forecast to enter recession by the end of this year and remain that way throughout 2023 as rising inflation puts pressure on both households and businesses
  • Bond funds best weathered the last three recessions
  • But differing central bank policy makes equities compelling this time around

UK May Be Heading For A Recession

Kate Marshall, Lead Investment Analyst, Hargreaves Lansdown:

“Against a backdrop of rising inflation and falling consumer spending, the UK is forecast to enter recession by the end of this year and remain that way throughout 2023. Unemployment remains relatively low in the UK, but rising inflation is putting pressure on both households and businesses.

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Rising fuel and energy costs are one of the main culprits. This reduces how much consumers can spend on goods and services, while businesses are forced to either take the pain and absorb costs, or raise prices which could impact consumer demand.

While the UK may be heading for recession, this isn’t new news for investors. As the market is already anticipating recession, much of the bad news is already reflected in stock market prices. During the Covid-induced recession in 2020, and the global financial crisis of 2008-09, bond funds held up relatively well.

Traditionally, bonds are a safe haven during tougher times for the market. But investors should be mindful the environment we’re in now is different. In the previous two recessions, the Bank of England slashed interest rates, making investments in bonds and the income they pay more attractive.

Fast forward to today and interest rates are increasing at a regular pace to try to curb inflation. This puts pressure on bonds and has seen their prices fall this year. While the interest they pay now looks more attractive, rising rates could put further pressure on bonds.

That said, if things get better, rather than worse, next year and the Bank puts the brakes on rising rates, this could put bond funds on a stronger footing.

While uncertainty persists, investors should think about maintaining balance in their portfolios. Multi-asset funds are a good way to spread risk, as they invest across a variety of assets, sectors, and countries. Some explicitly aim to provide some shelter when markets are turbulent.

Dividend-paying funds can also prove valuable in tough times. Managers of these funds aim to invest in companies they believe are resilient enough to continue to pay dividends to shareholders or have a proven ability to survive an uncertain economic backdrop.”

Best Performing Fund Sectors In The Last Three Recessions

10 best performing sectors*

31/12/2019 to 30/06/2020 31/03/2008 to 30/06/2009 30/06/1990 to 30/09/1991
IA Technology & Telecoms IA USD Government Bond IA UK Gilt NR
IA USD Government Bond IA USD Mixed Bond IA North American Sm Companies
IA UK Index Linked Gilt IA Global Emerging Markets Bond Blended IA £ Corporate Bond
IA USD Corporate Bond IA EUR Corporate Bond IA UK All Companies
IA USD Mixed Bond IA USD High Yield Bond IA Specialist
IA China/Greater China IA Global Mixed Bond IA Standard Money Market
IA UK Gilt IA UK Gilt IA North America
IA Global Government Bond IA Short Term Money Market IA UK Equity Income
IA Healthcare IA Targeted Absolute Return IA £ Strategic Bond
IA EUR Corporate Bond IA Japanese Smaller Companies IA Unclassified

*note IA sectors have changed over time

Fund Picks To Invest In To Survive Recession

Troy Trojan

“With an expectation that markets will be volatile while there is continued economic uncertainty, a total return fund like Troy Trojan could be a good choice. It typically invests in a mix of investments including shares, bonds, commodities and currencies.

This could help provide modest growth over the long term and help provide some shelter when stock markets fall. The fund tries to experience less ups and downs than the broader global stock market or a portfolio that's mainly invested in shares.

As a result, it could form the foundation of a broad investment portfolio, bring some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio.”

Fidelity Global Dividend

“The Fidelity Global Dividend fund aims to deliver long-term income and growth, with a focus on providing some shelter in weaker markets. The manager’s unconstrained investment approach allows him to invest anywhere in the world, but he tends to favour large companies from developed markets.

He won’t compromise on quality and is mindful of valuation – how much a company’s share price should be compared with its prospects. The fund could provide international diversification to an income-focused investment portfolio and work well alongside ‘growth’ orientated funds.

There’s a broad range of themes in the fund with a focus on more defensive sectors like consumer staples and pharmaceuticals.”