There are two ways investors should broadly view the turmoil currently hitting equity markets: a gigantic buying opportunity or an impetus to move to greater protect your portfolio against further falls.
For many the smart thing to do is to look to buy what will make the most on the – fingers crossed – upside, while others will look to add to funds pursuing a cautious strategy so to build in further diversification.
In this article, we take a look at the perfect pairings for one of the most popular funds in the Investment Association universe for a cautious outlook: FE Alpha Manager Iain Stewart’s £9.1bn Newton Real Return.
Stewart has headed the fund since 2004 and has built up a reputation for protecting capital on the downside and during periods of heightened volatility. During this nearly 12 year period he has outperformed the FTSE All Share by more than 10 percentage points as well as doing so with less of the market volatility.
Invesco Perpetual Global Targeted Returns
First up Steve Lennon, investment manager at Parmenion: “A good partner for Newton Real Return would be Invesco Perpetual Global Targeted Returns, in my opinion,” he said.
“The fund aims to deliver equity like returns of LIBOR + 5 per cent with less than half the volatility over three year rolling periods and is on track to do so.”
“The strategies employed in the fund are very different to Newton Real Return which results in a low correlation of 0.64 over the past two years.”
Lennon also points to the fund’s managers – David Millar, Dave Jubb and Richard Batty – as being a very experienced team, particularly due to their work on “the highly successful” £26bn Standard Life Global Absolute Return Strategies (GARS) fund.
Millar (pictured), Batty and Jubb, joined GARS in 2008 but moved to Invesco Perpetual in 2012, where they launched their rival fund one year later.
Like GARS, the fund employs a broad range of strategies, or ‘trades’ that they believe will cumulatively help to hold up the fund in a wide variety of possible market scenarios as well as deliver ‘equity-like’ returns over a three year period.
Since the launch of the fund it has returned 12.64 per cent while the average fund its sector returned 6.7 per cent and the FTSE All Share index fell 3.2 per cent.
Performance of fund, sector and index since launch
Source: FE Analytics
Volatility was less than a third of the FTSE All Share index over the same period while maximum drawdown – the amount you would have lost if you’d bought and sold at the worst possible time was 4.38 per cent compared to the FTSE’s 14.53 per cent.
The fund has a clean ongoing charges figure [OCF] of 0.87 per cent.
Gina Miller, of wealth manager SCM Direct, takes a somewhat different approach to pairing up Newton Real Return due to current market conditions.
“Whilst it is natural to look for more conservative strategies just after major market setbacks, I would look for something slightly more adventurous to sit alongside [Newton Real Return],” she said.
“At current valuations it is hard to think that buying a simple straightforward equity product (e.g. the FTSE 100) won't pay off.”
“Ironically its exposure to overseas earnings, oil and gas and commodities could well be a positive contributor from here,” she added.
A portfolio split half between the FTSE All Share and Newton Real Return would have delivered a return of 61.84 per cent over the past 10 years and delivered two thirds the volatility of the FTSE All Share.
Performance of portfolio, fund and index over 10yrs
Source: FE Analytics
“Investors can buy a tracker eg the iShares FTSE100 ETF for an annual 0.07 per cent per annum,” Miller added.
Old Mutual Global Equity Absolute Return
Chelsea Financial’s Darius McDermott next strikes a contrasting tone. He thinks this $4.6bn fund makes a perfect pairing with Newton Real Return because of its distinct lack of correlation to equities.
“Newton Real Return is a good fund but quite correlated to equities. Hence I nominate the Old Mutual Global Equity Absolute Return fund which is not correlated, so a good fit.”
According to FE Analytics, the fund has a very low negative correlation to UK equities of -0.01, about as low as it gets. By comparison, Newton Real Return has a positive correlation of 0.82.
The portfolio – co-managed by Ian Heslop, Amadeo Alentorn and Mike Servent who launched the fund back in 2009 – aims to deliver absolute returns over rolling 12-month periods – which it has had a high level of success in doing in recent years
Over the past three years it has performed strongly compared with the MSCI World index and delivered substantially lower volatility.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
It is run on a quant-driven strategy, and is market neutral in terms of not being focused toward a particular market direction, hence its low figure for correlation to equities
Old Mutual Global Equity Absolute Return also aims for a low correlation with bond markets, which our data suggests it has a done since its launch.
It also has a very low maximum drawdown standing at just 3.83 per cent over three years whereas the FTSE All Share’s was 14.53 per cent.
The fund has clean OCF of 0.85 per cent charges a performance fee of 20 per cent of outperformance of its hurdle rate subject to a high watermark.
Last up Saunderson House’s Joe Smith tips this fund, co-managed by Chris Burvill and FE Alpha Managers Jenna Barnard and John Pattullo.
“The fund has underperformed its sector over the last year, largely due to the value-focused investment style of the lead manager, Burvill, remaining out of favour,” he said.
“However, Burvill has taken advantage of the fall in stock markets over the past six months to buy into the weakness, increasing the equity allocation within the fund via holdings in attractively valued cyclical areas such as consumer services, financials and, selectively, energy.”
“Should sentiment improve and the gap between value and growth stocks narrow, as Burvill believes it will, he thinks the fund should see a decent uplift in performance.”
A relatively risk-on positioning by Burvill should be offset in the meantime by the more defensive portfolio of Newton Real Return, should current conditions persist, he adds.
Henderson Cautious Managed has returned of 9.13 per cent over one year lagging its sector and putting the fund in the bottom quartile.
It has a clean OCF of 0.72 per cent.