Mark Dampier: Hedge your bets with an 'absolute return' fund

Since the turn of the millennium the UK stock market has experienced two near-50 per cent declines. These occasions are still fresh in investor's minds, and many people are still ruing investments made at what turned out to be peaks in the market. If you lose half of your capital you have to double it just to break even, so it is little wonder funds seeking to reduce volatility and preserve capital have become increasingly common.

Another reason for the popularity of these "total return" or "absolute return" type funds is that a large proportion of the investing public are nearing retirement or already there. If you have accumulated a decent sum of money you certainly don't want to lose it at this stage of your life – there may be insufficient time for markets to recover before you need it. Funds that aim to limit the downside, albeit capping the upside too, have a greater appeal.

Blackbridge Diversified Growth Fund is among the lesser-known names in this area. You probably haven't heard of the fund, or indeed Momentum Global Investment Management, who run it. Yet Momentum is a large organisation employing more than 15,000 people and listed on the Johannesburg stock exchange with a market cap of around £2.5bn. They launched the Blackbridge fund in March so there is only a short track record to go on, though they also have a similar institutional fund, Momentum Diversified Target Return, with a three-year history over an exceptionally volatile period.

The greatest fall in the institutional fund was 9.6 per cent against a FTSE 100 drawdown of 21.9 per cent and the MSCI World of 33.5 per cent. Overall it has shown around half the volatility of the FTSE even though it is up almost 32 per cent against the FTSE return of 12.1 per cent. While it is still early days for the Blackbridge fund, it is shaping up to be the type of fund many investors will be interested in and its maximum drawdown so far is 8.4 per cent against the FTSE's 15.5 per cent.

While the fund's main philosophy is to lose as little as possible, to beat cash you need to take some risk. As such the fund has a wide investment remit including global equities, bonds and commodities, and the management team of Michael Allen and Christopher Mahon move the portfolio actively between these asset classes depending on where they see the best value. They do this with reference to "scenario testing" to find assets that can produce the best returns across a range of economic circumstances. In other words they look to take the optimum investment route, taking into account the best and worst case scenarios as they see them. Wherever possible they seek out uncorrelated investments to reduce the overall risk of the fund.

Within each asset type they also look to invest with the best managers. For example, they have been using BlackRock for government bonds, and Schroders for emerging market debt. They also will take a passively managed solution if they believe it offers better value.

At present the fund is relatively cautiously positioned with around 25 per cent in developed world equities and comparatively little allocated to emerging markets, though they do feel opportunities are now arising here. Although they expect a tough 2012, they feel corporate bonds, and in particular high-yield bonds, are looking exceptionally good value, and this is where much of the fund has been invested for some months. It hasn't been a comfortable ride as this area has sold off recently while government bonds have done better, but the Blackbridge team feel the relative value on offer is compelling.

This is exactly the type of fund that many investors should have at the core of their portfolio. The only problem is one of expectations. Should markets go up very strongly, sensibly-managed, diversified funds like this will tend to lag behind and look rather dull. However, for those investors focused on longer-term capital preservation without excessive volatility, it is certainly something to consider.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent