‘High octane’ is only a slight exaggeration to describe the flavour of my investment portfolio, which given its humble size has not been too nerve-racking and actually somewhat successful in terms of its return considering the wider market context of recent months.
As shown below, I have a selection of natural resources, gold equity, Japanese and European funds at the moment. However, I have taken the decision to sell down this exposure and opt for more defensive and cautious positioning.
My reasons for this are three-fold.
Markets seem increasingly unsupported by fundamentals and prone to high volatility. Secondly, it seems unlikely that there will much happening in terms of upside for two or three months while the UK builds up to go to the polls for the Brexit referendum. Lastly, currency markets seem to be dominating more than I am use to and this adds an extra layer of complexity that I don’t understand enough to leverage.
Most of the funds I currently own are growth, value or recovery strategies – all in equities – and not as concerned with downside protection as they are with capturing upside. To say the least, several of the markets are also contrarian, having been heavily out of favour for many years.
Of course, an ongoing debate surrounds the value of cautious funds in the investment world as well as the futility of market timing, as Charles Stanley Direct’s Rob Morgan points out.
“Taking some more defensive positions would be no bad thing but I am wary about micro-managing and timing the market in the short term. It’s bitten me a few times so I am much more a buy and hold investor these days adding to favoured holdings especially in equity income and smaller companies on the dips,” he said.
Indeed, ‘buy, hold and forget’ is the motto of many investors for good reason but now seems the time to bank profits, hold some cash and buy more defensive strategies from my perspective.
Mike Deverell, investment manager at Equilibrium, also says it is a good time to go more defensive and hold alternative type vehicles.
“There is nothing wrong with going more defensive right now, we have certainly been doing that in a number of ways. We have reduced equity and were are holding a lot more alternative equity funds and absolute return funds,” he said.
“We like these [absolute return] funds at the moment. In this sort of environment there is a lot of opportunities for them to make money because you currently have a divergence between monetary policy in different parts of the world.
“Divergence is a good time for absolute return funds – playing one thing off against the other. They can do currencies, they can go long and short on bonds and equities, and do various other things”
A number of purchases of BlackRock Gold & General and JPM Natural Resources, for example, have paid off nicely over the past few months for me as the gold price has rallied and mining stocks have staged a tentative recovery. I think it seems sensible to bank these profits.
Performance of funds over 1yr
Source: FE Analytics
Ben Conway, co-manager of the Hawksmoor Vanbrugh and Hawksmoor Distribution funds, says despite the rapid and strong gains of the BlackRock gold fund, now is not the time to sell.
“I wouldn’t sell BlackRock Gold & General – gold is the best way to express a lack of credibility in central banks. I think it could go a lot higher as investors increasingly realise the lack of impact on the real economy that ever more aggressive monetary policy is having,” he said.
“Gold miners are leveraged to the gold price and their marginal costs are now a lot lower than they were a decade ago. If you are genuinely nervous about markets, then I expect gold to be negatively correlated to risk assets and this fund thus suits your view.”
My holdings in Japan and Europe did very well last year but now seem to carry less positive momentum from their quantitative easing (QE) stimulated rallies and forecasted recovery. Baillie Gifford Japanese and Schroder Tokyo has also been strong performers but, like my holding in Schroder European Alpha Plus, there has been little progress for some time and an increasing poor outlook.
These markets somewhat rode a wave of optimism following the unveiling of QE back at the end of 2014 when I bought them but after initial rallies have been broadly selling off for 11 months. I have added to Baillie Gifford Japanese at several occasions when the fund lost lots of ground in the Black Monday sell-off in August 2015 and in January 2016.
Performance of funds since December 2014
Source: FE Analytics
While it again looks ‘cheaper’ at current levels, it seems that the Japanese recovery story is – at best – on hold and Europe looks no better.
Deverell also agrees on Europe but says Japan is looking very attractive at current levels.
“We are not too keen on Europe. It’s OK but it is probably the most expensive of the major regions when you look at valuation points out there,” he said.
“Japan is probably the cheapest of any of the established regions. It is one of the areas that just hasn't really recovered. This is partly due a strong yen but to my mind that just makes it more attractive right now so I would not look to sell.”
“Profits are still growing in Japan, unlike a lot of the other areas where you have seen big earnings falls such as in the UK.”
Alex Wright’s Fidelity Special Situations fund I expect will be a good long-term holding but the UK equity market and the fund has struggled in recent months, mostly due to Wright’s style bias towards value stories which for some time have seen him favour UK banks.
Some sort of Brexit concern seems imminent and so for now I am also going to sell this fund with the hope of buying back in soon at a better price.
“Brexit is an interesting one. It depends on whether you are prepared to make a call on which way it is going to go. Not a lot of the uncertainty is feeding through into markets but you are seeing it in the currencies. With sterling being down, if you believe it will stay down then that is positive for most of the large companies in the FTSE because they make most of their profits overseas. That actually helps there profits,” Deverell said.
“What could well happen is it strengthens again if it looks like an in vote – of course if it is an out vote it will weaken even further which might be another positive for those large companies. So it is very difficult call to make. Having some cash makes sense because if you do see some turmoil then you have an opportunity to buy in,” he said
My core holdings will now include Alastair Mundy’s Investec Cautious Managed and Iain Stewart’s Newton Real Return funds as well as Standard Life Global Absolute Return Strategies (GARS) for defensive diversification and hopefully modest returns.
In addition, I am going to hold another Newton fund – the £4bn Newton Global Income fund – as well the £11.7bn Invesco Perpetual High Income but utilise the accumulation share classes over the income ones.
The two funds operate in the same areas, that being large and mega-cap defensive stocks with strong income characteristics. Should there be further weakness, I would expect this area of the market to do better than value or small and mid-caps.
Lastly, I am going to buy my first ever bond fund: FE Alpha Manager Iain Spreadbury’s £3bn Fidelity Moneybuilder Income fund.
Deverell also has bought this fund recently.
“It is sort of investment grade corporate bond. That is also one of our calls at the moment. We have recently had very little fixe interest at all but more recently topped it up. That asset class has done really well in the last months and we think it should continue for a little bit because you have now much wider spreads over gilts than you have seen for a long time,” he said.
“I don’t think you are going to see many corporate defaults. It is also diversifies equity risk quite nicely too.”