There has been a sense of foreboding about this, however.
Several leading fund managers had been warning over the summer that equity markets were overvalued, there were growing risks such as tighter monetary and, while all this was going on, implied volatility was at very low levels – suggesting complacency was rife in the market.
Those managers who built up cash in their portfolios seem to have made the right decision, as the FTSE has dropped to 6,350 – at the time of writing – having already fallen by 1.25 per cent in the first few hours of Friday morning.
It means that the FTSE 100 has lost 5.74 per cent over the last month and that figure is expected to be much greater by the time markets close.
Performance of index over 1 month
Source: FE Analytics
There are still headwinds on the horizon as well; according to the large majority of managers we have spoken to recently.
George Osborne’s comments about the impact of the eurozone on the UK economy seems to be the spark that has lit this most recent fuse, but a weak oil price, the unknowns about a world without QE and the prospect of higher interest rates are all seen as reasons to remain cautious.
That being said, not many believe we are on the brink of 2008-style mega-crisis and, as Andy Merricks told us a number of weeks ago, there is a distinct lack of “mania” in the market – which is a common precursor to a giant fall.
So, with that in mind, should investors be using this fall as buying opportunity? Peter Walls, who has built up an 18 per cent cash weighting in his £20m Unicorn Mastertrust fund, doesn’t think so; well, not yet anyway.The manager invests in closed-ended funds and says that while he will be looking to buy soon, there could be further falls.
“Fairly typically, discounts tend to react slowly to changes in market directions,” Walls (pictured) said.
“I’m going to sound old now, but I remember back in 1987 when the market fell out of bed, it took a few days for the news to filter through. Eventually, bad news always filters through but I would say it is too early to be thinking about bargains in the investment trust sectors.”
“I’m monitoring the situation and I do want to commit that capital I have in cash, but as yet I haven’t. I view this as a healthy correction, however, and nothing more sinister.”
Trevor Greetham, director of asset allocation at Fidelity, has a different view on it, however.
“With commodity prices falling this is a disinflationary shock and that means central banks will most likely trigger a rally by stepping up their stimulus operations or by signalling a further delay before raising interest rates,” Greetham said.
“It's normal for volatility to pick up at this time of year. It's also normal for a temporary pull back to set equity markets up for a period of stronger returns going into the New Year.”
“We are overweight equities in our multi asset funds and we've used recent market weakness to add to that position."
While Rob Morgan, pensions and investment analyst at Charles Stanley Direct, says long-term private investors shouldn’t be overly concerned about short-term market movements, this is a classic example when they should be looking to take advantage.
“These are the sorts of time when you want to be looking at areas of the market that were perhaps looking toppy earlier in the year,” Morgan said.
“As a long-term investor, these sorts of corrections should be used as opportunities because the market is now cheaper. You are never going to time the market perfectly, but you should be trying to use volatility to your advantage.”
Areas which he think investors should be focusing on are medium and smaller companies, which have already had a tough year so far following their stellar gains in 2012 and 2013.
Performance of sector and indices since Jan 2012
Source: FE Analytics
“Investors in small and mid-caps will tend to outperform over the long term, it’s a fact of life in the market really. Again, you’re never going to time it perfectly but it is definitely better to be looking at them now than after they have had a stellar quarter.”
One fund he likes, which has been beaten up recently, is Old Mutual UK Dynamic Equity.
The five-crown rated fund has been run by FE Alpha Manager Luke Kerr since its launch in June 2009 and is benchmarked against the FTSE 250 ex IT index.
While it has outperformed against the IMA UK All Companies sector and the index year to date, since the rotation in the spring away from the high multiple growth stocks that littered the smaller companies space, the fund has lost a hefty 10 per cent.
Performance of fund vs sector and index in 2014
Source: FE Analytics
However, Morgan still rates the fund – which also has the ability to short – due to Kerr’s stock-picking abilities.
According to FE Analytics, for instance, it has been the ninth best performing portfolio in the sector since its launch and, more importantly, it has comfortably beaten its benchmark over that time with returns of 163.30 per cent.
Performance of fund vs sector and index since June 2009
Source: FE Analytics
The £250m fund, which is domiciled in Ireland, has a high weighting to industrials, with the sector accounting for 38.7 per cent of the fund’s AUM.
Kerr is set up to take advantage of economic recovery in the UK and US, with domestic facing businesses such as Ashtead Group and Barratt Developments featuring in his list of top 10 holdings.
He currently has 49 positions in his long book and 13 in his short book. Old Mutual UK Dynamic Equity has a clean ongoing charges figure (OCF) of 1.15 per cent.
