Debt burden
Simon Edelsten, who runs the Artemis Global Select fund, says events in recent years, such as the war in Ukraine and the pandemic, have been “counted as beyond most investors' recipe for stress tests – inflation and interest rates of 5 per cent should be within normal stress tests as should an oil price between $80 (£69) and $100. The latter has been a common financial condition over the past few decades.
He says: "When a portfolio is stress-tested, different factors affect value in different scenarios, but some factors are common. Recessions affect cyclical stocks, higher interest rates affect the valuations of stock on high earnings multiples, rising bond yields tend to make geared asset plays such as real estate stocks fall.
"Also generally, companies with high barriers to entry and an ability to pass cost increases through higher prices tend to cope well.
"In the Artemis Global Select portfolios we therefore select for investment-only companies with proven pricing power, but then diversify the portfolio across different sectors (automation, medical, digital) as well as valuation, ending with a portfolio no more expensive than the index, but with greater long-term growth potential and companies with stronger than average balance sheets."
He adds: “Although style has traditionally offered a means of diversification and value has outperformed growth, these cycles can be difficult to time. Investors can, however, turn to other more stable diversifiers.
"US dollar exposure for example could help UK investors until US interest rates peak next year. Year to date, the S&P 500 is down 22.7 per cent in USD but only down 5.7 per cent in sterling terms.
"Alternative strategies such as trend-following strategies tend to act as cheap equity put options and have delivered substantial returns for the first time in almost a decade.
"Alternative asset classes can provide long-term diversification, including listed infrastructure such as wind farms. They can offer an attractive level of income, inflation-linked cash flows and less sensitivity to parts of the economic cycle.”
David Jane, a multi-asset fund manager at Premier Miton, says he thinks in terms of themes and big-picture issues as a way to create a portfolio that is diversified for the risks of the future.
Among the themes represented in his portfolio are, “a big energy theme right now and a big reflation theme, which is sectors such as materials (mining, agricultural commodities and fertiliser) as well as ageing populations (health care) amongst others”.
Healthcare stocks are usually considered not to be cyclical, while energy stocks are, so owning both in the same portfolio offers exposure to different types of economic or market outcome.
