Three ways to add defensive characteristics to your portfolio

If the current environment is making you feel a little uneasy, you are not alone. Investing can be uncomfortable when an energetic US president who is, at best, predictably unpredictable, is calling the shots. While US markets have borne the brunt of this volatility, the tariff regime and geopolitical tensions create an uncertain environment for companies around the world.

In this environment there is an understandable urge to put everything in cash and hide under a blanket until the worst is over. However, interest rates are also falling, so cash doesn’t look as appealing. There are a range of collective funds that have proved more defensive in tough markets but should provide greater inflation protection and stronger growth than a savings account.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Income

In volatile markets, income is an investor’s best friend. Even if the capital value of your investment is bouncing around, you still get a portion of your investment back each year. VT Chelsea Managed Monthly Income is a fund that aims to pay roughly the same amount of income each month so that you can budget with confidence.

The fund targets an above-market income that is sustainable and consistent, as well as some capital growth, over the long term. The fund will invest across bond and equity markets, and selectively across property and infrastructure. It moves the asset allocation around flexibly depending on the environment.

Manager Darius McDermott says: “Whilst others focus on short-term numbers and panic out of perfectly good assets, we are happy to pick them up at bargain prices and secure the long-term income of the fund. With high yields on offer, this is the best time to be an income investor in the past decade and we are excited for the future.”

Lower-risk equity

There will be those investors who still want stock market investment, but are starting to worry about market concentration in the US, and the technology sector in particular. Rather than panic-selling all your US exposure, another option is to balance it with a more defensive, ‘value’-focused fund that will include different types of company.

The Artemis Income fund would be one option. With a focus on ‘special situations’, it invests in companies it sees as undervalued. That gives it a natural resilience that has seen it do well in the toughest markets. This fund is designed to be an all-weather fund that won't ever shoot the lights out but shouldn't greatly disappoint either. Over the long term, it has been slightly less volatile than its sector peers.

The fund’s highest weightings are in financials, consumer discretionary consumer staples, and healthcare companies*. It is first quartile in the UK Equity Income sector over one, three, five and ten years in spite of a relatively tough environment for its approach**. While it has had periods of weakness, and will not be immune to market sell-offs, it is a good counterbalance to the frothier elements of global stock markets.

Diversification

In volatile markets, diversification is vital. You need something to zig while the rest of your portfolio is zagging. This is where an allocation to real assets can come in. The Cohen & Steers Diversified Real Assets fund invests across property, infrastructure, natural resource companies and commodities. It will do the zigging in your portfolio. In 2022, for example, when bond and equity markets slumped in response to higher interest rates, real assets bounced higher. Vince Childers, head of real assets multi-strategy at the group, said this was a ‘real time proof of concept’ for the sector.

Real assets should also offer some protection against inflation. Childers says of the current environment: “If investors are undiversified, they need a strong stomach for risk.” He believes a holding in real assets provides a strong counterweight to technology-focused indices such as the S&P 500 and MSCI World.

While all these funds still have market exposure, they should be more defensive than standard stock market funds, and can bring balance to a portfolio. They provide an alternative to the ‘hide under a blanket’ strategy, which – while effective in the short-term – is not a long-term option for your wealth.

*Source: fund factsheet, February 2025
**Source: FE Analytics, at 6 March 2025

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. The views expressed are those of the author and fund managers and do not constitute financial advice.