Volatility is rising in equity, fixed income and currency markets, with renewed turbulence being seen in most assets as both stocks and bonds broadly head south.
Mostly due to mounting worries over the future of the European recovery as well as the eurozone itself, thanks to deadlock between Greece and its creditors, spikes in volatility have been seen this week in equity markets close to home as well as those further afield including the US, China and India.
This adds to 2015’s generally bad period for bond markets, where despite quantitative easing by the European Central Bank and Bank of Japan, bond yields have shot up.
These trends can be both good and bad for investors. Greater volatility can mean additional and superior chances of picking up bargains but it also implies more ‘sleepless nights’ and a greater chance of overtrading or buying/selling at the wrong time.
Lloyds Bank head of economic research & market strategy Adam Chester said: “The extreme uncertainty surrounding the latest developments in Greece has made forecasting near-term movements in foreign exchange and interest rate markets especially difficult. Until the dust has settled – one way or the other – financial market volatility is likely to remain elevated.”
With this in mind, three managers at Fidelity Worldwide Investment offer strategies they believe can help to dampen down the summer’s expected market instability.
“Don’t be swayed by sweeping sentiment”
Ian Spreadbury, manager of several fixed income portfolios including the £1.6bn Fidelity Strategic Bond fund, says despite a particularly unpleasant time for bond investors in recent months and the anticipation of more to come, this may prove a boon to less risky parts of the market.
“We’ve seen a broader rise in government bond yields of late and the recent uptick in volatility took many by surprise, with most commentators trying to rationalise the move with a blend of technical and fundamental factors – such as crowded investor positioning and shifts in inflation expectations,” he said.
“I anticipate there will be some more volatility to come, especially if the situation with Greece goes on for much longer without some form of resolution. However, the shortage of ‘safe havens’ in the market should see demand for high quality assets hold up and I would also expect the reach for yield dynamic to kick in again at some point.”
“I look to protect against bouts of volatility by holding a good level of diversification across various types of bonds, such as government bonds, supra-nationals, investment grade corporate bonds and inflation-linked bonds. My funds are also well diversified on a sector basis and I continue to prefer companies that demonstrate a typically lower sensitivity to the economic cycle, have stable business profiles and provide steady cash flows.”
The FE Alpha Manager, who runs about £6bn in total at Fidelity, has had a clear focus on capital preservation over the long term. This is overt in Fidelity Strategic Bond fund, which has been top decile for its risk-adjusted returns and maximum drawdown over 10 years.
It has also outperformed in terms of total return, handing back 74.5 per cent to investors above their original stake, while the IA Strategic Bond sector managed just 51.67 per cent.
Performance of fund and sector over 10yrs
Source: FE Analytics
However, so far this year when fixed income has been selling off, the fund is down, although a six-month period is a relatively short amount of time to judge a fund’s strategy.
“Buy ‘quality’ income stocks”
Michael Clark, portfolio manager of the £1bn Fidelity Moneybuilder Dividend fund, believes holding equities where earnings are stable and balance sheets are strong will be increasing attractive, which should provide greater demand for these shares and push their prices up.
“Sustainable dividends paid by high quality, cash generative companies are particularly attractive during volatile market conditions because they continue to offer investors a regular source of income regardless of the environment,” he said.
“In addition, these types of companies tend to be large-cap, defensive businesses which are typically less volatile than small and mid-cap companies. High quality income paying stocks tend to be leading global brands that can perform throughout the market cycle.”
The outperformance of income paying stocks is reflected in the returns given by two highly rated trackers: Vanguard FTSE UK All Share Index and the Vanguard FTSE UK Equity Income Index.
While the latter has outperformed since its launch in December 2009, it has also shown greater strength in periods such as 2011 and last year when market were weaker or flatter.
Performance of funds and index since December 2009
Source: FE Analytics
“Diversify asset classes to help to smooth returns”
Eugene Philalithis, manager of Fidelity Multi Asset Income fund, believes the most important tenant is diversification between different asset classes.
“Asset allocation can be difficult to get right in the shorter term, as market cycles can be brief and subject to periods of volatility. During volatile markets, leadership can rotate quickly between asset classes, sectors and geographical regions,” he said.
Investors can spread the risk associated with diverse parts of the market by investing in a mixture of different assets, providing an element of protection in market extremes.
“For example, combining riskier asset classes such as equities, real estate or high yield bonds and more defensive assets such as government and investment grade bonds or cash in a portfolio can help to smooth returns over time,” the manager explained.
FE Alpha Manager Philalithis invests in both equity and bonds funds in his £92m Fidelity Multi Asset Open Strategic fund, which he has managed since 2010.
Over the past five years it has returned just slightly more than half of the gain in the FTSE All Share but has done so with almost a third of the volatility and half the maximum drawdown.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
