Bond funds best weathered the last three recessions, but current central bank policy makes equities compelling this time around, according to Hargreaves Lansdown.
Kate Marshall, lead investment analyst at the firm, said during the Covid-induced recession in 2020 and the global financial crisis of 2008-09, bond funds held up relatively well, but they were different environments as interest rates were falling, whereas now they are still rising to curb inflation.
The UK is expected to enter recession by the end of this year and remain in recession throughout 2023, due to rising inflation putting pressure on households and businesses.
This is not news for investors, who have largely priced in an economic downturn.
But unlike in the previous two recessions, when the Bank of England slashed interest rates, making investments in bonds and the income they pay more attractive, this is not currently the case.
The Bank raised rates further this week (September 22) to combat inflation, which puts pressure on bonds as rising yields make their prices fall.
However, if the interest rates stop rising in response to a recession, this could put bond funds on a stronger footing, said Marshall, who pointed to multi-asset funds as a potentially good option for investors in the case of a recession.
Marshall said: "While uncertainty persists, investors should think about maintaining balance in their portfolios.
"Multi-asset funds are a good way to spread risk, as they invest across a variety of assets, sectors, and countries. Some explicitly aim to provide some shelter when markets are turbulent.
"Dividend-paying funds can also prove valuable in tough times. Managers of these funds aim to invest in companies they believe are resilient enough to continue to pay dividends to shareholders or have a proven ability to survive an uncertain economic backdrop."
Marshall has picked two funds she thinks can weather a recession: Troy Trojan and Fidelity Global Dividend.
“With an expectation that markets will be volatile while there is continued economic uncertainty, a total return fund like Troy Trojan could be a good choice," she said.
"It typically invests in a mix of investments including shares, bonds, commodities and currencies. This could help provide modest growth over the long term and help provide some shelter when stock markets fall.
"The fund tries to experience less ups and downs than the broader global stock market or a portfolio that's mainly invested in shares. As a result, it could form the foundation of a broad investment portfolio, bring some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio."
On the Fidelity Global Dividend she said it aimed to deliver long-term income and growth, with a focus on providing some shelter in weaker markets.
The manager tends to favour large companies from developed markets and would not compromise on quality while being mindful of valuation, she said.
