Investors in the UK equity market have been rocked by a fairly unpleasant last few months, with various macroeconomic woes causing significant volatility and hefty drawdowns.
It means that 2015 has very much turned into a year of two halves.
Since the FTSE 100 reached its record high and even broke through 7,000, headwinds such as spikes in government bond yields, falling commodity prices, the Greek debt negotiations and, more recently, China’s equity market collapse and weakening economic data meant the UK equity market was down some 16 per cent between April and late August.
While some of those losses have since been recovered, it has been a highly volatile few weeks.
Performance of FTSE 100 since its peak
Source: FE Analytics
However, given the scale of the sell-off and huge price swings seen in markets since the events of ‘Black Monday’ last month, some experts have warned that the current conditions are a worrying precursor to something more dramatic.
FE Alpha Manager Charles L. Heenan, manager of the Kennox Strategic Value fund, warned that the recent sell-off has been down to a gradual build-up of concerns in markets after an extraordinarily long rally in nearly all asset classes as a result of ultra-low interest rates and quantitative easing (QE).
“I find it fascinating that the explanation for all these falls is China as I think there are other drivers at work. I don’t think you get that sort of volatility without bigger stories going on and one of which is how QE has driven up most asset classes,” Heenan said.
However, Fidelity’s Leigh Himsworth says the best plan for investors in the current environment is to do very little.
Himsworth, who heads up the £70m Fidelity UK Opportunities fund, is one of the select FE Alpha Manager ‘hall of famers’ meaning he has witnessed a variety of market conditions during his long-career in which he has run UK funds at Franklin Templeton, Royal London, Gartmore and City Financial.
Performance of manager versus peer group composite during career
Source: FE Analytics
His major tip for UK investors is to remain calm.
“The volatility we have seen in recent weeks can lead investors to panic. The problem with panic is that it often leads to taking the wrong decision,” Himsworth (pictured) said. 
“It’s wise to sit back during times of volatility and think about the implications of the underlying causes of the movements in markets, but also to look for opportunities. It’s right to remember that there are also lots of positives out there.”
“The market’s returns over the last six years have been very healthy for investors and the outlook is still attractive – the UK economy is still very good, wage inflation is coming back to the market, the oil price has fallen, which is great for the UK consumer, and food prices continue to fall as well.”
A number of experts have also highlighted the attractiveness of equities post the correction, such as Royal London’s Trevor Greetham who said that his team’s ‘composite investor sentiment indicator’ has signalled “one of the strongest contrarian buy signals on record” comparable with the onset of the financial crisis in 2007, the Lehman collapse in 2008 and the euro crisis in 2011.
“This suggests a strong bounce, especially if we get policy shifts to turn market sentiment around,” Greetham said.
“We remain positive on equities and we are buying the dip on Wall Street. We see great similarities with the Asia crisis of the 1990s with the US generally on a path to monetary tightening but with Asia slowing, this time led by China not Japan.”
However, while Himsworth is relatively positive in his outlook, he doesn’t recommend a scatter gun approach by any stretch of the imagination. He says investors need to be selective as simply buying the market at this point in time is likely to be dangerous.
“It’s right to remember that we have seen a significant sell-off in the UK market in the realms of 15 per cent since the peaks of April,” he said.
“Now this, for me, puts the market on a fairly attractive market level but I still see risks given the events in China and more globally with the US potentially raising interest rates and so forth.”
Himsworth’s Fidelity UK Opportunities fund has held up far better than most during the recent crisis, posting top quartile gains so far in 2015 while also sitting in the IA UK All Companies sector’s top decile for its maximum drawdown year-to-date.
This has added to the fund’s longer term track record of outperformance, as since its launch in September 2011 it has been a top quartile performer with returns of 69.1 per cent meaning it has nearly doubled the gains of the FTSE All Share in the process.
Performance of fund versus sector and index since launch
Source: FE Analytics
One of the major reasons for that outperformance is Himsworth’s multi-cap approach. Indeed, he currently holds just 27 per cent in the FTSE 100 while the rest of the portfolio is split across mid and small-caps.
Given the recent volatility has been macro-orientated and has hit the internationally focused FTSE 100 index more so than more domestically biased small and mid-caps (which are being buoyed on an improving UK economy), Himsworth says that if investors are going to add to areas following the sell-off then they should look lower down the market cap spectrum.
For example, through his thematic growth approach, he has been buying companies such as Melrose, Mattioli Woods, GB Group and Playtech, which are listed on the FTSE 250 and AIM indices.
“There has been a recent bid for the bulk [of Melrose] from a US private equity operation, that significantly de-risks the investment and provides a shorter term opportunity in the realms of 10 to 15 per cent – a great place to hide money if we are concerned about where markets are,” Himsworth said.
“Combining that with more medium-term opportunities such as low interest rates, a key position for us is Mattioli Woods which is absolutely thriving in the current environment in terms of advice for individuals regarding their pensions and overall investment outlook.”
“Then finally there are the very long-term opportunities which are typically technology-related opportunities (in terms of how the equity market is evolving and how we are all spending our time), we are looking to play it in terms of ID security via GB Group.”
“Or, we are trying to play the theme of how we are all wasting our time in the evening with online gaming which is where Playtech is thriving as they are writing a lot of the software which is played globally.”
