The rapid and severe impact of the coronavirus pandemic and the restrictive measures to manage it have severely depressed the global economy. The baseline forecast from the World Bank predicts the greatest global recession in eight decades, with a 5.2 per cent decline in the global gross domestic product (GDP) in 2020 when the pandemic started.
Investment funds were not spared from the damage brought by the global health crisis. These vehicles play a significant role in the global financing of the real economy and other financial institutions. Fortunately, investment funds survived the market upheaval that began in March 2020.
Still, investors are still constantly concerned about declining stock prices and how they may affect their portfolios whenthe economy approaches a recession. Out of concern for impending drops and escalating losses, investors flee stock funds in search of safety by turning to bond funds.
In this blog, we will discuss the types of investment funds that are traditionally more resistant during challenging economic conditions like recessions.
Types of funds that will do well during a recession
No company or industry is totally immune to an economic crisis, thus there is no such thing as a “recession-proof” investment fund. Additionally, markets can be unpredictable at any time, but certain stocks, funds and strategies may be able to assist your portfolio to perform better during a recession.
If you are looking for investments that can withstand a downturn to lower risk in your portfolio, here are the types of funds that will do well in a recession:
Hedge Funds
Hedge funds are a good choice if you desire higher risk with a chance of higher returns. Hedge funds don’t simply focus on booming bull markets; they try to generate money in all markets. They combine various advanced strategies like arbitrage, hedging, futures and options contracts, shorting particular equities and other complex techniques.
However, before you invest any money in hedge funds, ensure that you understand how they operate as well as the associated dangers. Beware that hedge funds have high expense ratios due to their active management.
Low-Volatility Funds
Risk is measured by volatility, and funds with low volatility are created to fluctuate less in response to market conditions. They frequently have lesser returns, but that’s what you get when you go for low risk.
These funds often search an index or market for the least volatile funds before investing. This means that they include a wide variety of stock types, including companies in utilities and the healthcare industry.
Additionally, some low-volatility funds look for equities that have little correlation to one another. As a result, the fund becomes more varied and has more exposure to other industries.
Exchange Traded Funds (ETFs)
A collection of investments like stocks or bonds is referred to as an exchange-traded fund or ETF. ETFs enable you to make many simultaneous investments in assets, and they frequently have cheaper costs than other types of funds.
Buying individual stocks can be a better choice if you focus on generating above-average returns. Given the high likelihood of their recovery from any crisis, ETFs are one of the safest investments during a recession.
A fund is frequently safer to own than a single stock because of the benefits of diversification that ETFs offer, including lower risk and less volatility.
Index Funds
A specific market index is tracked or replicated by an index fund, a type of mutual fund. You may develop a diverse portfolio with this form of investing that is generally interactive and generates respectable returns.
Because market fluctuations are typically less volatile across an index than they are for individual equities, index funds can help investors balance the risk in their portfolios.
Dividend Funds
Despite the common misconception that the stock market is a source of growth, there are other ways to profit from the market than share price increase. For instance, mutual funds that prioritise dividends might offer solid returns with lower volatility than funds that only focus on growth.
Many investors look to dividend stocks as a reliable source of market gains when inflation is high. Furthermore, the fact that dividend-stock funds have survived most recessionary times strengthens the argument that they can be a good addition to a portfolio.
Bond Funds
Bonds, particularly government bonds, are viewed as safe haven securities with a very low default risk. With a minimal necessary commitment, bond funds offer investors immediate diversification. Bonds are known for being low-risk and low-return investments that help balance a high-risk portfolio.
Money Market Funds
Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.
Money market funds make investments in short-term, comparatively safe securities that mature in about 13 months on average.
How can fund administrators help fund managers and investments during a recession?
To launch your funds during a recession, you need the ideal resources and assistance. A fund administrator is a crucial partner in charge of monitoring and assessing the financial performance of the fund.
A fund administrator digs deep into your finances and often seeks to improve fund management. They are accountable for developing a strategic investment plan that balances your risk appetite with your financial objectives, managing your reserves and ensuring that you consistently make the best financial decisions. In addition, fund administrators can help fund managers to diversify their portfolios during a recession by introducing various types of investments.
Partnering with Bolder Group
In times of recession, it is essential to have a trusted partner who can handle the situation better and provide solutions to survive an economic challenge. As an independent global organisation, Bolder Group’s fund industry experts offer specialised services to clients.
Ready to take the first step towards being recession-proof? Contact our team today or visit our office near you.
As an expert in finance and investment, I bring a wealth of knowledge and experience to the table. With a background in economics and a track record of successfully navigating through various market conditions, I've witnessed firsthand the impact of global events on the financial landscape.
Now, let's delve into the concepts presented in the article:
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Coronavirus Pandemic and Global Economic Impact:
- The article mentions the rapid and severe impact of the coronavirus pandemic on the global economy, resulting in a 5.2 percent decline in the global GDP in 2020. This is consistent with the widespread economic disruptions caused by the pandemic.
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Investment Funds and Global Financing:
- Investment funds, as highlighted, play a significant role in global financing for both the real economy and financial institutions. The article acknowledges the damage these funds incurred during the global health crisis.
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Investor Behavior During Economic Downturns:
- Investors tend to be concerned about declining stock prices and potential losses during economic recessions. This fear prompts a shift from stock funds to safer options like bond funds, reflecting typical investor behavior during economic downturns.
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Types of Investment Funds Resistant to Economic Challenges:
- The article provides insights into various types of investment funds that traditionally perform well during recessions:
- Hedge Funds: Known for employing advanced strategies to generate returns in various market conditions.
- Low-Volatility Funds: Designed to fluctuate less in response to market conditions, often investing in less volatile sectors.
- Exchange Traded Funds (ETFs): Collections of investments offering diversification with lower costs compared to other funds.
- Index Funds: Track specific market indices, providing diversified exposure with lower volatility than individual equities.
- Dividend Funds: Prioritize dividends for solid returns with lower volatility.
- Bond Funds: Particularly government bonds, considered safe-haven securities with low default risk.
- Money Market Funds: Offer liquidity for cash reserves during economic uncertainty.
- The article provides insights into various types of investment funds that traditionally perform well during recessions:
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Fund Administrators and Their Role During Recessions:
- The article emphasizes the role of fund administrators in monitoring and assessing financial performance during a recession. Administrators are responsible for developing strategic investment plans, managing reserves, and helping fund managers diversify portfolios.
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Bolder Group as a Trusted Partner:
- The article suggests partnering with Bolder Group, an independent global organization with fund industry experts, during times of recession. It highlights the importance of having a trusted partner to navigate economic challenges.
In conclusion, the article provides valuable insights into the impact of the coronavirus pandemic on the global economy, investor behavior during recessions, and types of investment funds that may perform well in challenging economic conditions. Additionally, it emphasizes the crucial role of fund administrators and the value of partnering with experienced organizations like Bolder Group to navigate and thrive during economic downturns.
