BlackRock UK Absolute Alpha, Brooks Macdonald Defensive Capital and Premier Defensive Growth are Chelsea Financial Services’ top absolute return picks for protecting against further market falls. 
After a strong 2017 and a solid start to 2018, markets have become more volatile over the past week as investors have grown fearful of faster rate hikes amid expectations of higher-than-anticipated inflation.
Darius McDermott (pictured), managing director of Chelsea Financial Services, said: “When markets are high across the board, it doesn't take much to spook them.
“The recent falls are sentiment-based rather than fundamentals-based however and, while I expect markets will come off a little more, I do not think this is the start of a full-blown bear market.”
He added: “Global growth is still positive and we haven't had a raft of companies missing their earnings targets – they are all fine still. It’s inflation which has surprised, coming in stronger than expected.
“Many people will be worried that this is the start of a prolonged correction, but I think this is premature.
“It is a good wake-up call to investors to make sure their portfolios are in a fit state to withstand such an event, however – to make sure their portfolios are diversified and have some form of cushion to lessen the impact of a larger fall.”
As such, McDermott has highlighted three funds below that could help protect investors against further falls in the market.
BlackRock UK Absolute Alpha
The first fund on McDermott’s list is the four FE Crown-rated BlackRock UK Absolute Alpha, managed by Nick Osborne and Nigel Ridge.
The £402.4m long/short UK equity fund targets a positive absolute return for investors regardless of market conditions.
Performance of fund vs sector & benchmark over 10yrs
Source: FE Analytics
As the above chart shows, the fund has delivered a total return of 31.02 per cent over the past decade compared with a 32.01 per cent gain for the average IA Targeted Absolute Return sector fund. It should be noted, however, that the sector is home to a range of different strategies.
“The manager will use contracts for differences [CFDs] to secure short positions, aiming to make money when share prices fall as well as rise,” explained McDermott.
He added: “It is a very useful portfolio diversifier, with much lower volatility than the UK equity sector average.
“The manager has a pragmatic approach to stock selection, taking the macroeconomic environment into account as well as looking at each individual company's fundamentals.”
BlackRock UK Absolute Alpha has an ongoing charges figure (OCF) of 0.92 per cent and also carries a performance fee of 20 per cent above the Libor 3-month benchmark, subject to a high water mark. In the year to 28 February 2017, the fund’s charge amounted to 1.51 per cent.
Brooks Macdonald Defensive Capital
McDermott’s second fund for protecting against falling markets is five FE Crown-rated IFSL Brooks Macdonald Defensive Capital.
The £489.9m fund is managed by Jonathan Gumpel, Niall O’Connor and Robin Eggar and aims to deliver positive absolute returns over three-year periods by investing in more defensive assets with lower risk characteristics and less volatility than equities.
“While the types of assets that this fund holds can be a bit complicated – convertible bonds, preference shares, structured notes, bond and loan assets, and discounted assets – the goal of delivering positive total returns even when the market falls is straightforward enough,” he said.
Performance of fund vs sector since manager appointed
Source: FE Analytics
“The managers seek to create a portfolio with predictable performance, by investing in assets that have fixed returns.”
McDermott added: “They keep a close eye on the portfolio mix and won’t hesitate to sell one of their holdings if its yield drops unacceptably or if it seems likely to move in tandem with falling markets.”
Since Gumpel was appointed towards the end of June 2011, the fund has generated a total return of 40.57 per cent, as the above chart shows.
Brooks Macdonald Defensive Capital has an OCF of 0.82 per cent.
Premier Defensive Growth
The final fund highlighted by McDermott is Premier Defensive Growth, managed by head of fixed income Paul Smith.
A four FE Crown-rated fund, it aims to deliver positive returns on a rolling 36-month basis and invests across a number of themes discount opportunities, relative valuation, defined investments, trading strategies and short-term catalysts.
McDermott said: “The strategy has been thoroughly tested in a wide range of scenarios and has continued to deliver.
“The manager's strategy and temperament are well-suited to delivering low-risk positive returns and cautious investors may like the defensive nature of this fund and the fact that it is not expected to participate in very large market falls – or large market rises.”
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over three years, the fund has returned 4.11 per cent, compared with a 6.62 per cent rise for its average sector peer.
The £511.1m fund is included on FE Invest’s Approved List for its ability to control risk while producing positive returns.
“Premier Defensive Growth offers an unusual approach to absolute return by focusing on non-traditional instruments, such as structured notes,” FE Invest analysts noted.
“The team has developed a great expertise in investing in those instruments. It believes these instruments are easier to use as it is easier to model its return and risk profile over a defined investment horizon.”
Premier Defensive Growth has an OCF of 0.85 per cent.