As FE Trustnet highlighted earlier today, certain funds can protect investors more effectively in a sell-off or extended bear market. On the other hand, higher risk funds are usually the ones which are hit hardest during times of weakness. However, they are the ones which will normally rally the strongest when negative sentiment subsides. With that in mind, we ask the experts which funds investors should look to snap-up after a correction because although they may not be a great buy now, they have demonstrated the ability to outperform when equity markets rebound.
Standard Life UK Equity Unconstrained
“The classic example would be Ed Legget’s Standard Life UK Equity Unconstrained fund,” Rob Morgan, pensions and investment analyst at Charles Stanley Direct, said.
“It is a volatile fund and, like a number of other funds at Standard Life, it tends to make its money in upward markets but doesn’t protect too well on the downside. Legget is a pretty bullish manager and it is one I would want to use when sentiment is picking up.”
Legget took over his now £1.1bn Standard Life UK Equity Unconstrained fund in April 2008.
The manager isn’t tied to a benchmark and can therefore take a value-focused, almost contrarian approach, which tends to lead his fund to vastly outperform the UK market when investors are willing to take more risk.
According to FE Analytics, it has been the second best performing portfolio in the highly competitive IMA UK All Companies sector since he took over with returns of 177.06 per cent, beating the sector average by more than 125 percentage points.
Performance of fund versus sector and index since April 2008
Source: FE Analytics
However, as Morgan points out, the majority of those returns have come when sentiment is bullish. For instance, it returned close to 100 per cent in the rebound year of 2009 and more than 40 per cent in last year’s bull market.
It did fall by 40 per cent in 2008 and 20 per cent in 2011 when the eurozone crisis intensified, however. Its ongoing charges figure (OCF) is 1.15 per cent.
JM Finn Global Opportunities
Morgan also rates the JM Finn Global Opportunities fund, which is headed up by Anthony Eaton, for those investors who want to take advantage of a strongly rising market.
“It’s pretty similar because when markets fall, it will tend to suffer,” Morgan said.
“Quite often, Eaton invests in more momentum driven, higher P/E companies which are normally hit hard during a correction. However, due to what it invests in, it is a type of fund you want to pick up after a sell-off.”
While the £75m fund sits in the IMA Global sector, it primarily invests in companies that have exposure to, or derive a large proportion of their earnings, from the emerging markets. Therefore, it can be viewed in a similar light to the popular M&G Global Basics fund.
Eaton started managing JM Finn Global Opportunities in October 2005, over which time it has been a top quartile performer with returns of 104.94 per cent. It has made the most of rising markets, boasting top decile returns in 2009, but like Legget’s fund, it fell much further than its peers in 2008.
It has underperformed the sector over recent years, however its high weighting to emerging market facing companies and mining stocks will have undoubtedly contributed to its lack-lustre relative returns.
Its OCF is 1.08 per cent.
Old Mutual UK Smaller Companies Focus
Due to their perceived riskiness, smaller companies tend to fall much further than the market during times of stress. However, history has proven that investors who have had a high weighting to small and mid-caps have been the ones which have been most rewarded when risk assets rebound.
FE Alpha Manager Daniel Nickols’ Old Mutual UK Smaller Companies Focus fund, which is a more concentrated version of the managers UK Smaller Companies fund, is one FE Research’s favoured portfolios in the IMA UK Smaller Companies sector.
“Despite being a relatively concentrated portfolio, the fund is not much riskier than its peers,” Younes, analyst at FE Research, explained.
“Since Nickols also takes into account the macroeconomic environment and the business cycle, the fund’s performance is not dependent on his stock picking skills alone.”
“This diversity of performance sources should help the fund to generate above-average risk-adjusted returns over the long-term. Short periods of underperformance are possible, but in such scenarios, FE expects Nickols to quickly adjust his portfolio in order to improve performance.”
Despite that, Younes says this is fund more suited to long-term investors who aren’t willing to stomach extreme swings in value.
Nickols took over the five crown rated fund in January 2009 and it has been a second quartile performer over that time. It has also beaten the sector and its Numis Smaller Companies ex IT benchmark over rolling one, three and five year periods.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
The £128m fund is made up of 76 holdings and has an OCF of 0.93 per cent.
GAM Star Technology
Charles Hepworth, investment director at GAM, doesn’t sit in the market correction camp.
He says that investors are focusing too much on the index, when in fact there has already been a correction of sorts as investors have rotated out of high-multiple growth, or more cyclical, stocks into larger defensive names.
He has therefore been buying up units in the $564m GAM Star Technology fund as it has been one which has been hit hard during the recent volatility. However, if markets were to sell off more aggressively, he expects it to be one which bounces back strongly when sentiment once again picks up.
It is managed by Mark Hatwin and was launched in February 2011.
According to FE Analytics, it has been the best performing fund in the IMA Technology & Telecoms sector over that time with returns of 47.15 per cent. However, it has fallen by close to 10 per cent over the last three months.
Hatwin counts the likes of Facebook, Google and Tencent as top holdings. Its total expense ratio (TER) is 1.71 per cent.
Scottish Mortgage Investment Trust
Due to their structure, investment trusts tend to fall further than unit trusts and OEICs during sell-offs as investors are hit with the “double-whammy” effect of a falling NAV and a widening discount. However, this “double-whammy” effect also tends to help closed-ended funds to outperform in bull markets.
Ewan Lovett-Turner, associate director of investment companies research at Numis, says that if investors want to play a market rebound via an investment trust, Scottish Mortgage – which is run by the highly regarded James Anderson – would be a good choice.
“An obvious one would be Scottish Mortgage, which does pretty well in rising markets and its track record over the last three to five years has been very good,” Lovett-Turner said.
“It’s emerging market and growth bias, as well as a high weighting to technology, means that it typically does well in rising markets, but that also means it will be hit more than others when markets fall,” he added.
Our data shows that Scottish Mortgage has returned 275.71 per cent since Anderson took over the portfolio in April 2000, beating its benchmark – the FTSE All World index – by close to 170 percentage points in the process.
Performance of trust versus sector and index since April 2000
Source: FE Analytics
It was a bottom quartile performer in the IT Global sector in the falling markets of 2008 and 2011, but beat its benchmark and was top quartile in the bull markets of 2009, 2010, 2012 and 2013.
Scottish Mortgage currently trades on 2.3 per cent discount, having been on a 7 per cent discount at times over the past 12 months. The closed-ended fund has gearing of 10 per cent and its ongoing charges are 0.51 per cent.
