Capital Preservation Investment Portfolios and Funds for a Core Retirement Portfolio

The standard way to implement Capital Preservation in a Retirement portfolio is with the typical stocks and bonds Core investment where bonds are used to preserve the capital, but as a DIY/DFY investor, you have the option of increasing/diversifying this part of your portfolio during market falls.

In recent times (mostly after the Great Financial Crisis 2008), there were attempts made by the investment industry to address the increased volatility in financial markets affecting investment returns. Total return funds, sometimes called ‘absolute return funds‘, are more conservative than other types of funds. They normally contain a mix of investments including shares, bonds, commodities and currencies, and may employ derivatives and shorting to smooth out volatility in their underlying investments.

However, there is a view that fund performance in this fund class has been mixed with many not meeting their own performance targets. Different fund managers employed a diverse range of strategies to achieve the ‘total return’ investment aim and this, it would appear, may explain the diverse (and sometimes disappointing) performance of these funds.

To counter that narrative an experienced (and indeed award winning) London city professional Investment/Fund manager I know had this to say about Total Return funds and why they are better than Index Funds:-

"Why “absolute return” funds? This should be obvious. The investment world has gotten more risky, not less, since the global financial crisis. Global politics are a mess, and a rising interest rate cycle will play merry hell with traditional portfolios, and not least with bonds. Managers pursuing an absolute return thesis will be more appropriate than plodding index-trackers. The time to use index-trackers will be after the next major correction, when markets are once again objectively cheap"

Absolute Return / Total Return funds are also typically ‘Multi-Asset‘ funds where fund managers use their experience and expertise investing in un-correlated assets such as Gold etc to preserve Capital. You can clearly see the out-performance of the equity-based Core funds above but they are performing a completely different job.

The Man GLG Alpha Select Alternative comes highly recommended as a top performing Total Return fund. However, this comes at a cost in terms of the fund charge. 

Personally, I am invested in the CGT and RICA investment trusts for the capital preservation element of my portfolio. These were recommended to me by a trusted source, an investment manager with decades of experience in the financial markets.

Ruffer Investment Company (RICA)

Shares mag JULY 2020 ran an article on what to invest in in a downturn. The capital preservation section showed RICA to be the best in class capital preservation fund during the covid crash 2020.

Ruffer Investment Company (RICA) has fared the best among capital preservation trusts in 2020. It has delivered against its objective of preserving shareholder capital regardless of the market conditions, while also seeking out some much-needed growth.

Despite significant market stress and economic uncertainty, its all-weather portfolio generated a net asset value total return of 10.1% for the 12 months to 30 June 2020. Ruffer not only protected capital in the sell-off in February and March 2020, but also managed to capture the rebound since April, posting one of its strongest three month periods ever in the second quarter of 2020.

Though its shares were hit hard in early 2020, positive portfolio contributions came from credit protection, gold, index-linked bonds.

The Classic Capital Preservation Asset – GOLD

Why “real assets” and the monetary metals? Because they are 'sound money'. Gold and silver have always been “money good” – nobody has ever been forced to use them as money; their use arose spontaneously in free markets and economies over thousands of years.

Gold has solid safe-haven credentials, particularly when measured over months or years. You can get low-cost exposure from iShares Physical Gold ETF (SGLN) which has an ongoing charge of 0.19%. PHGP (WisdomTree) charges 0.39% whereas the iShares ETF only charges 0.19%.