According to FE Analytics, the FTSE All Share has lost more than 5 per cent since 5 September while the VIX index – a commonly used measure of volatility – has risen 44.5 per cent.
Performance of indices over 1 month
Source: FE Analytics
Paul Warner (pictured), managing director of Minerva Fund Managers, says the market looks set to have a 15 per cent correction and is therefore waiting for it to pull back before buying into the long/short Odey Swan fund for his ISA.
He says he hasn’t been so bearish for more than 20 years, believing the market is underestimating the threat of a strong correction in the coming months.“January/February 1994 was the last time I was so bearish. There wasn’t a cloud in the sky and this time there are quite a few clouds in the sky. People have been talking about them but not acting on them,” he said.
“I think it is absolutely nuts that everybody has been bullish on Europe this year, ignoring the fact that Putin is eating up parts of it and joining it into his empire and having sanctions banged against him which affect the European economy. Yet investors were pooh-poohing that only six months ago.”
The Odey Swan fund is relatively new to the Odey stable, having only been launched in March 2013.
Headed up by FE Alpha Manager Crispin Odey, the fund is a UCITs version of the star manager’s well-established Odey European hedge fund and has mostly the same holdings.
Since the fund was launched it has lost 10.07 per cent compares to an average loss in its sector of 1.2 per cent.
Performance of fund and sector since Mar 2013
Source: FE Analytics
However performance has picked up over the past month as the FTSE All Share has been falling and volatility has increased.
It has returned 10.75 per cent compared to a sector average loss of 1.86 per cent.
Performance of fund and sector over 1 month
Source: FE Analytics
Warner says as the fund had done pretty poorly until recently he hadn’t bought in but will do so when the market has fallen a bit further.
“The fund had quite a poor first few months but has been doing well recently and it has suddenly come to life. On a long-term basis it is something I want tucked away in my portfolio. He [Crispin Odey] is one of those people that is ahead of the game. He has been more cautious; although he wouldn’t say he is bearish now,” he said.
“The advantage of a fund like that is it’s long and short because he uses derivatives. It is a bit like his European hedge fund which has been going for years, which has done very well over a long-term basis.”
“My view is that when QE1 and QE2 ended we had a 15 per cent correction each time within a month and I was expecting therefore we might see a 15 per cent correction now. Historically, October is normally a good month for the FTSE All Share. More than 73 per cent of the time it has gone up during the month and so the fact we having a bad start could mean things are going to be pretty bad.”
Warner’s analysis of the FTSE All Share suggests a trend rate that has shown a floor for the index looks set to be broken for the first time since the market bottomed out in the financial crisis’ aftermath in 2009.
“If you look at the FTSE from the 2009 low there is a trend line that captures all of its lows and right now is the first time that it has been broken – which doesn’t necessarily mean anything but it could mean that this bull run has terminated and the correction could be greater than people are anticipating.”
Performance of index since Apr 2009
Source: FE Analytics
Warner says he was in fact more bullish in 2008 than now, which is why he is waiting for the market to fall further before adding the fund to his personal holdings.
“I bought back into the market in late 2008 – for my own portfolio – when the gilt yield switched over with the equity yield. I thought that was a trigger but it took another six months. Everyone was saying ‘this is the end of capitalism as we know it’ and the last time I heard that was in 1975 when that was the time to buy. So those two factors triggered me to buy.”
