Stock markets are speedily plummeting today in what is quickly becoming the worst losses for more than six years in global equities and has quickly been dubbed ‘Black Monday’ by some parts of the financial press.
Chinese stocks, which are leading the selling, have seen their biggest falls since 2007 but developed markets have also been hit by panic selling with the FTSE 100 down 4.08 per cent today at the time of publication, marking a 16.4 per cent fall since an all-time high in April 2015.
But experts such as Jim Wood-Smith, head of research at Hawksmoor, say investors should buy into the fast falling equity markets, where rapid selling has accelerated following worries that Chinese growth is slowing faster than anticipated and the world’s second largest economy is heading into a crisis.
While most markets are in the red today, the worst hit has been the Chinese domestic indices with falls of around 8.5 per cent being seen. However, from the end of April 2015 the FTSE has also seen its most bearish period since the 2011 European sovereign debt crisis. Large caps have been the worst hit, owing to the index’s international exposure and the dominance of oil and mining stocks.
According to FE Analytics, which does not yet include today’s further falls, the FTSE All Share is down 12.9 per cent. With today’s further pain, the index is down more than 15 per cent.
Performance of indices since 27 April 2015
Source: FE Analytics
Wood-Smith (pictured) says the selling is irrational and constitutes a worthy occasion to enter markets.
“Either the world has changed or this is a humungous buying opportunity. It is getting increasingly uncomfortable to say this, especially as it has become a weekly occurrence, but this does not feel as if it is anything other than a normal, panic-ridden August,” he said.
“We have long bemoaned the lack of value in many asset classes, we have equally fretted about the absence of a good sell-off. What we are seeing is overdue, natural and healthy. It is opportunity, not cause for panic.”
Darius McDermott, managing director at Chelsea Financial Services, says while the FTSE 100 has been the worst hit, this has mainly been due to the commodity and oil & gas names while small and mid-caps have been also sold despite their more domestic focus and reliance on the Chinese growth story.
“If you think the world is not going to end and that valuations have got substantially cheaper in the last eight to 10 weeks, but particularly in the past eight to 10 days, you may want to play the recovery in a slightly higher beta type of idea,” he said.
“That could be a mid or small-cap fund such as Neptune UK Mid Cap or a Marlborough fund, which is our favourite group for small-caps. The Marlborough Special Situations fund is a blend of small and mid-caps. Either of those would be sensible ways of playing through very good managers.”
Neptune UK Mid Cap and Marlborough Special Situations are both managed by FE Alpha Managers, Mark Martin and Giles Hargreaves respectively.
Over the past three years they have both returned more than their respective indices (Neptune UK Mid Cap is benchmarked against the FTSE 250 and Marlborough Special Situations the FTSE Small Cap).
They have also held up better since markets sold off this year. However, over the past two weeks they have taken a small hit of about 1.4 per cent each.
Performance of funds and indices over 3yrs
Source: FE Analytics
Neptune UK Mid Cap and Marlborough Special Situations have respective clean ongoing charges figures (OCF) of 0.82 and 0.8 per cent.
Tilney Bestinvest’s Jason Hollands (pictured), on the other hand, thinks the Standard Life UK Equity Income Unconstrained and Ardevora UK Income funds are ideal ways to buy into the market following the recent falls.
“Standard Life UK Equity Income Unconstrained is very different from other equity income funds, which would typically have 70 per cent in the FTSE 100. This fund actually plays a lot more in the mid-cap space but also tends to have more weighting in smaller companies than most of its peers,” he said.
“Although you could argue that makes it racier, actually the approach on the fund is very risk aware. Manager Thomas Moore has managed to avoid a lot of the large-cap mine fields. He hasn't held any of the commodity and oil & gas stocks.”
Moore tends to look away from the more popular equity income names, finding ideas across the market cap spectrum which has seemingly paid off. He has a reasonably unconcentrated portfolio of about 50-60 stocks, mostly in the FTSE 250 followed by the FTSE 100.
Hollands said: “He has pretty simple approach, which is he treats every penny as if it were his own money and won’t touch large divided generators if he thinks there is a risk that the cover is too weak. It is a great way of using the whole bandwidth of the UK market to pick good dividend paying stocks.”
“Ardevora UK Income also has a very distinctive approach. It also invests right across the market, so typically it has a much larger exposure to mid-caps in particular. The approach in the fund is very distinctive because it draws heavily on behavioural psychology.”
Jeremy Lang, who heads up the fund, uses a ‘cognitive psychology strategy’ rather than a value or growth approach to picking stocks. The manager looks for stocks believing investors, managers and analysts in financial markets are likely to make predictable mistakes as well as having inherent biases that create value opportunities.
“The team on the fund don't meet companies' management because they believe that is just a distraction. They are very driven by the numbers and trying to identify companies that have been essentially overlooked by the market and have the potential for re-ratings,” Hollands said.
Both funds are top decile over three years, having almost trebled the 27 per cent gain of the FTSE All Share over this time.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Standard Life UK Equity Income Unconstrained and Ardevora UK Income have respective OCFs of 1.15 per cent and 0.94 per cent.
Lucy Walker, a multi-manager at Sarasin & Partners, backs an offshore fund: the Banor North America Long/Short fund.
“The fund shorts bad or broken businesses and so will be benefiting from the recent market volatility. On the long side, they will be using the falls to increase the quality of their portfolio, with their focus on value,” she said.
“The fund has a net exposure of around 50 per cent, so will be helping to protect capital versus the S&P.”
It has beaten the S&P 500 over the past three years with a return of 56.12 per cent versus a gain of 49.71 per cent. It has also much lower volatility than the index.
Performance of portfolio and index over 3 years
Source: FE Analytics
It has an OCF of 1.91 per cent.
