INVESTORS have been pouring into “alternative” investments such as water and wood to shelter from this month’s turmoil in the equity markets.

The FTSE 100 index of leading shares closed down 3% on Friday after a week of huge volatility. It is 9% lower than three weeks earlier when the trouble began, sparked by fears that higher global interest rates would force companies and consumers to tighten their belts.

Many commentators predict the jitters will continue. Bank of England governor Mervyn King warned last week that “tremors in financial markets” could herald more turmoil to come.

Central banks in Europe, America and Asia have also taken the unusual step of injecting billions into the money markets to shore up confidence.

We asked some of Britain’s top professionals what they were buying in such choppy stock markets.

Water

Andrew Popper at SG Hambros, an investment bank, is backing water investments for steady returns. He said: “They display a relatively low correlation with the rest of the stock market, which means they will not necessarily fall as much in a downturn.”

Water also has long-term growth potential. As populations and economies grow, it is becoming increasingly apparent that there is not enough to go round. According to China’s water minister, 40% of the population already lives on an amount of water considered to be below international danger levels.

This has created growing demand for desalination, filtration, new pipelines, water transport and pumps – and an opportunity for investors to cash in.

Pictet offers a specialist Luxem-bourg-based fund investing in everything from water-treatment firms to bottled-water producers.

The US exchange-traded fund Power Shares Water Resources is another option. It is up 16% since the start of the year in dollar terms and 13% when converted back into sterling against a 3% fall for the FTSE 100 in the same period.

Forestry

Theodora Zemek, manager of the cautious New Star Managed Distribution fund, has been taking a look at forestry bonds. She said: “Wood is a low-risk investment, has little correlation with other assets and provides protection against inflation.”

Forestry was last year’s best-performing asset class, beating shares, bonds and commercial property, with a return of 20.6% in 2006, according to the IPD, a research firm. The forestry bonds Zemek is looking at are issued in America and Canada, where they typically offer a return up to two percentage points higher than US government bonds – currently about 6.75%.

Other options are the Cambium Global Timberland fund, which invests in forestry in America and Australia, and the Phau-nos Timber Fund, which listed on AIM in December. However, they are likely to be more volatile than the bonds.

Commercially managed woodland is free of inheritance tax after two years and you pay no tax on income derived from it. Any increase in the value of the timber is exempt from capital-gains tax (CGT). Those with £50,000 to spend can invest in a forestry trust that pools money to buy woodland. Forestry Investment Management is planning a new fund.

Bespoke protected funds

Firms are pushing guaranteed equity bonds, which give you exposure to the stock market but also guarantee to return your cash if shares tumble.

Nationwide launches a plan tomorrow that offers up to 70% of growth in the equity markets and also promises to return the original investment plus 10% at the end of five years.

However, standard schemes have many problems – not least that you are tied in for a fixed term and you will have to pay a penalty if you exit early, perhaps if the markets look like they are taking off again and you want to get the full benefit.

But private banks such as SG Hambros can create bespoke guaranteed products that don’t lock you in. You have to be wealthy, though, as you normally need liquid assets of at least £500,000 to become a client.

If this is beyond your means, there are some decent protected plans available to everyone. Jus-tin Modray of Bestinvest recommends Morgan Stanley’s FTSE Protected Growth 18, a six-year product that offers 160% of the FTSE 100’s growth with full capital protection. However, gains are subject to income tax.

Barclays’ five-year Protected FTSE Plan offers 120% of the FTSE 100’s growth, which is lower than Morgan Stanley. But profits are only liable for capital gains tax, and you might avoid this by using your allowance.

Blue chips

Far from viewing the market turmoil as a reason to quit the market, some of Britain’s best investors are viewing it as an opportunity to pick up large firms at bargain prices. Strong businesses that generate plenty of cash and pay good dividends have a better chance of withstanding further turbulence.

Russell thinks mega caps such as Glaxo Smith Kline, Unilever and Vodafone will beat the market if the turmoil continues. Citi-group recommends British American Tobacco, Scottish & Southern Energy and Tesco.

If you prefer a fund, Mark Dampier at Hargreaves Lans-down, an adviser, highlights Schroder UK Alpha Plus, Gart-more UK Focus and iShares FTSE 100, an exchange-traded fund that tracks the index.

Swiss bonds

Steve Russell at Ruffer, an investment manager, has been buying Swiss government bonds and Japanese utilities, such as Central Japan Railway, because he thinks that they will be two of the main beneficiaries of a rush into safe havens if the jitters continue.

He expects the Swiss franc and the yen to strengthen as borrowings in these currencies are repaid, boosting returns for UK investors. He said: “Much of the money that has been driving markets higher has been borrowed in these two currencies. If this is repaid the Swiss franc and yen could strengthen rapidly.”

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