The economy looks in rough shape and there could be worse news to come this Autumn. As a long-term investor, I have been thinking about how to position my portfolio both for now and the future. I think buying some shares in investment trusts could form part of that strategy. Here is why.
Preparing my portfolio for a recession
A recession can test some companies more than others. For example, a company like National Grid that is involved in critical infrastructure may see resilient customer demand no matter what happens to the economy. A tobacco firm like Imperial Brands can also benefit from the addictive nature of its products. By contrast, tightened consumer spending could be bad news for revenues and profits at a travel firm like On The Beach.
So when thinking about a recession, I am considering whether companies in which I could invest are likely to suffer, do just about the same, or buck the trend and actually benefit. For example, a restructuring specialist like Begbies Traynor could see revenues grow when businesses face tough times.
Diversification and investment trusts
One difficulty for me as an investor, though, is that it is difficult to make these sorts of judgements. A recession can affect companies in different and perhaps unpredictable ways.
For example, what might it mean for gas supplier Centrica? It could be bad news, as consumers cut back on energy spending. Or it might be that consumers use the same amount of energy, but regulators cap prices to help them at a time when money is tight. Then again, a recession might force competitors to the wall, meaning Centrica can grow its business. All of those could be viable outcomes in my view.
That illustrates what I see as the long-term benefit of diversifying one’s share portfolio. Whether or not the economy is struggling, diversification is a sensible risk management strategy in my view.
But if I am investing just a limited amount of money, it can be hard to diversify. Trading shares usually brings costs, so splitting a small amount of money over too many different companies could lead to me paying lots of charges.
That is where I think investing in investment trusts might help me. They offer me a form of diversification. By buying shares in one trust, I can often get exposure to dozens or even hundreds of different companies.
Active management
Some investment trusts are actively managed, while others basically track a key market index like the FTSE 100.
Both strategies could offer me exposure. But in a recession, a broad market tracker would inevitably invest in some companies that suffered as well as hopefully owning others that held their value or did well. By contrast, an actively managed trust could change its investment focus to reflect the different opportunities and risks thrown up by a recession.
Right now, therefore, I am looking at actively managed investment trusts like Scottish Mortgage and the European Assets Trust with an eye to adding them to my portfolio.