The first week of the year has been a calamitous one for investors as equity markets around the world have seen a sharp rout.
The volatility is springing from panic selling in China, but has spread for the second time in less than six months (remember Black Monday?) into global stock markets with the FTSE 100 suffering particularly hard, losing 2.7 per cent yesterday.
Performance of sectors and indices in 2016
Source: FE Analytics
This trend presents a pressing question: what to do (if anything) with markets both falling and potentially subject to more selling?
Buying opportunities can open-up during such events but, of course, nobody knows if there is further downside to come.
In this article we hear from the experts as to what funds the experts recommend to buy while markets are down, either to take advantage of the lower valuations or to protect against further downside.
Adrian Lowcock – ‘Buy defensive funds and look for value elsewhere’
Head of investing at AXA Wealth Adrian Lowcock (pictured) is expecting global markets to continue to have a “very negative” outlook and adds more volatility is to come. He says buying defensive funds could be a good course of action such as BlackRock Fixed Income Global Opportunities, Newton Real Return and AXA Distribution.
He recommends the former due to its broad mandate that allows investors and use of derivatives to produce a positive return. FE Alpha Manager Iain Stewart’s Newton Real Return fund emphasises capital protection and Richard Marwood’s AXA Distribution fund for the manager’s focus on income and reducing volatility.
“The BlackRock Fixed Income Global Opportunities fund provides a very diverse portfolio able to invest across the whole of the bond universe without constraints. In addition they are able to use derivatives to produce a positive return in all market conditions,” Lowcock said.
“Stewart runs an unconstrained and flexible approach which initially uses Newton’s thematic research to identify opportunities and to position the portfolio appropriately,” Lowcock said.
His £9bn portfolio has some high quality defensive stocks but more in government, corporate and index-linked bonds. He also has some commodities, infrastructure and floating rate notes as well as index futures and options to hedge against equity market risk.
Lowcock says the AXA Distribution fund is aimed more for very cautious investors, but also blends UK equites with government bonds as well as index linked gilts for inflation protection.
Despite his recommendation for cautious funds he adds: “Looking longer term the focus should be on where there is value and opportunity. In that respect Japan and European markets remain attractive for investors.”
Lowcock’s picks for the two regions are Henderson European Selected Opportunities and GLG Japan Core Alpha.
The funds had a solid performance last year, building three year track records ahead of both sectors and benchmarks, as both Europe and Japan seeing some of the strongest relative performance of any major market.
Performance of funds, sectors and indices over 3yrs
Source: FE Analytics
Henderson European Selected Opportunities has a clean ongoing charges figure [OCF] of 0.85 per cent and GLG Japan Core Alpha’s clean OCF is 0.97.
Of the defensive funds AXA Distribution is the cheapest at 0.75 per cent. BlackRock Fixed Income Global Opportunities’ OCF is 0.84 per cent while Newton Real Return’s is 1.11 per cent.
Darius McDermott and David Coombs - ‘Go long/short UK equities’
Chelsea Financial’s Darius McDermott (pictured), thinks that active funds using long/short strategies is the best portfolio diversifier.
He likes two absolute return funds that invest in UK equites to fit the bill, both use long and short strategies: the £969m Henderson UK Absolute Return and £117m Smith & Williamson Enterprise funds.
“They both have volatility of under a half of the FTSE and they tend to lose much less during a falling market. In fact in 2015 from the end of April peak to the market, low the Henderson fund was level and lost nothing. Both these funds are our big tip for the year for lower risk investors. ”
FE Alpha Managers Ben Wallace and Luke Newman head Henderson UK Absolute Return while the Smith & Williamson offering is managed by Rupert Fleming and Mark Boucher.
David Coombs head of multi asset investing at Rathbones also backs Henderson UK Absolute Return
“This is a classic long-short equity fund, which benefits from volatility as it takes short-term calls on individual shares – greater price movements simply mean more opportunities. These positions seek out returns uncorrelated with equity and fixed income markets.
“We thought the fund would be very useful in the months following the US Fed’s first interest rate hike, which proved correct.”
He says the portfolio comprises two parts, the first being a group of bottom-up, longer term positions.
“These are a mixture of long and short positions, typically with a one-year investment horizon. The second is a tactical book of trades that are on a one month-long timeframe.”
“The managers stick to large-cap companies for their portfolio, which we think makes sense for a long-short fund, as liquidity is very important for managing risk in such a strategy.”
The two funds have beaten the FTSE All Share’s 16.57 per cent gain over the past three years as well as delivering about a third of the volatility and a substantially lower maximum drawdown.
Performance of funds and index over 3yrs
Source: FE Analytics
Henderson UK Absolute Return has a clean OCF of 1.06 per cent while Smith & Williamson Enterprise is slightly cheaper at 0.97 per cent.
Jason Hollands – ‘Buy absolute return’
Tilney Bestinvest’s Jason Hollands says investors should pay close attention to absolute return funds to address volatility as these tent to be “less exposed to directional movements in markets”.
He also recommends two long/short strategies FP Argonaut Absolute Return and Threadneedle UK Absolute Alpha, as well as more multi-strategy funds such as Invesco Perpetual Global Targeted Returns and Standard Life Global Absolute Return Strategies [GARS].
FE Alpha Manager Barry Norris heads FP Argonaut Absolute Return, which is a more aggressive offering than Hollands’ other picks.
Invesco Perpetual Global Targeted Returns and Standard Life Global Absolute Return Strategies both follow a broadly similarly strategy of investing in a series of trades across very liquid and diverse asset classes.
Also, the former was set up by three of the GARS team back in September 2013 and has beaten GARS in terms of both higher returns and lower volatility.
Performance of funds and index since September 2013
Source: FE Analytics
Threadneedle UK Absolute Alpha has a clean OCF of 1.07 per cent while FP Argonaut Absolute is cheaper at 0.95 per cent. Invesco Perpetual Global Targeted Returns has a clean OCF of 0.87 per cent while GARS is slightly more expensive at 0.89 per cent.
Charles Hepworth – ‘Buy UK mid and small caps’
Next Charles Hepworth (pictured), investment director at GAM, says UK equities still offer some value outside of the FTSE 100.
“Small caps and mid-caps aren’t suffering to the same extent as the broad top line index so this is where some short term relative outperformance will be shown in many of the active UK funds out there.”
This was also the case last year when the FTSE 250 and FTSE Small Cap indices had a strong run while the FTSE 100 ended the year in negative territory.
According to FE Analytics, in 2015 the FTSE 250 and the FTSE Small Cap indices made 11.17 per cent and 9.17 per cent, respectively, while the FTSE 100 lost 1.32 per cent.
Hepworth chooses Jeremy Lang’s Ardevora UK Income fund for exposure to smaller companies although the portfolio takes more of a multi-cap approach.
Jeremy Lang, who heads up the fund, uses a ‘cognitive psychology strategy’ rather than a value or growth approach to picking stocks.
He looks for stocks with a belief that investors, managers and analysts in financial markets are inherently likely to make predictable mistakes as well as having biases that create value opportunities.
Ardevora UK Income has a clean OCF of 0.94 per cent.
