Five diversification plays for your 2013 ISA
06 March 2013
With many major stock markets, even in the developing world, demonstrating a high correlation to the FTSE All Share, investors need to look further afield to get true diversification.
Diversification is one of the key tools investors have to protect their savings, and for those who already have substantial funds in ISAs or other products it may be more beneficial to look for ways to diversify their exposure rather than add another fund that invests in the same area.
The major stock markets, including the largest in the developing world such as China, display a high level of correlation these days thanks to globalisation, meaning that investors need to look further afield to get true diversification.
The following five investments all have a low correlation to the UK market, which could come in handy if there is a sudden fall in the All Share index:
iShares MSCI Peru All Capped ETF
According to data from FE Analytics, the MSCI Peru index has displayed a low correlation of 0.33 to the FTSE All Share over the past three years.
In that time, the Peruvian index has grown 50.29 per cent while the UK market has made just 30.86 per cent.
The $335.7m iShares MSCI Peru All Capped ETF has made 53.44 per cent, slightly more than the index it aims to track.
Performance of fund vs indices over 3yrs
Source: FE Analytics
It holds 27 to 28 Peruvian stocks, is domiciled in the US and has a total expense ratio (TER) of 0.59 per cent.
FE’s head of research Rob Gleeson has tipped it as a fund he is using in his own ISA to give him access to a high-growth region with low correlation to the major markets.
BlackRock European Absolute Alpha
This £39m absolute return fund is one of the few to have made money in every calendar year since launch. In 2011 when the FTSE All Share fell 3.46 per cent, it made 5.69 per cent.
Over the past three years it has displayed a correlation of just 0.01 to the FTSE All Share.
Performance of fund vs index over 3-yrs
Source: FE Analytics
It has yet to receive the attention given to the biggest fund in the IMA Absolute Return sector – Standard Life GARS – perhaps because it invests in unfashionable Europe.
However, over three years it has made a respectable 17.14 per cent, putting it among the top quartile of funds in the sector.
It requires a minimum initial investment of £500 and has a TER of 1.74 per cent.
CF Eclectica Absolute Macro
This is another absolute return fund, managed by the famously bearish Hugh Hendry using a long/short strategy often employed by hedge funds.
The fund has extensive bond and currency positions as well as 31.7 per cent exposure to commodities.
In his most recent note to investors, Hendry wrote: "We believe the best antidote to the present low risk aversion seen across today's capital markets is to diversify across risk assets."
CF Eclectica Absolute Macro has displayed a correlation of -0.21 to the FTSE All Share over the past three years, with an annualised volatility of 6.13 per cent, less than half the 16.29 per cent of the index.
Performance of fund vs index over 3yrs
Source: FE Analytics
The fund has made 13 per cent since launch, according to data from FE Analytics, while the FTSE All Share has made 30.86 per cent.
It is available with a minimum initial investment of £5,000 and has a TER of 1.88 per cent.
CF Miton Special Situations
FE Alpha Manager Martin Gray and James Sullivan’s portfolio also has a negative correlation to the FTSE All Share, of -0.21 compared with the 0.91 of the IMA Flexible Investment sector.
The managers’ bearishness has caused them to underperform against their peers over the past year as markets have risen.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Rather than move into equities, they have retained a high level of exposure to the money markets, using the 28.5 per cent in those assets to make currency plays, largely on the strength of the dollar.
CF Miton Strategic Situations is a fund of funds, with exposure spread globally and across asset classes.
The TER is 1.73 per cent and the minimum initial investment is £1,000.
BlackRock Gold & General
FE Alpha Manager Evy Hambro’s £2.6bn fund has displayed a correlation of just 0.22 to the FTSE All Share over the past three years, according to data from FE Analytics.
It has not been a good period for investors in the mining sectors, and the fund is down 26.1 per cent over 12 months, according to FE Analytics data.
Over three years, the fund has lost 13.54 per cent, although it has been up by more than 35 per cent at certain points during the period.
Performance of fund vs index over 3yrs
Source: FE Analytics
This high volatility is one of the drawbacks of investing in commodities; however, funds such as these could be hugely beneficial to investors during a market sell-off, as they have a low correlation to bonds and equities.
BlackRock Gold & General is available with a minimum initial investment of £500 and has a TER of 1.75 per cent.
The major stock markets, including the largest in the developing world such as China, display a high level of correlation these days thanks to globalisation, meaning that investors need to look further afield to get true diversification.
The following five investments all have a low correlation to the UK market, which could come in handy if there is a sudden fall in the All Share index:
iShares MSCI Peru All Capped ETF
According to data from FE Analytics, the MSCI Peru index has displayed a low correlation of 0.33 to the FTSE All Share over the past three years.
In that time, the Peruvian index has grown 50.29 per cent while the UK market has made just 30.86 per cent.
The $335.7m iShares MSCI Peru All Capped ETF has made 53.44 per cent, slightly more than the index it aims to track.
Performance of fund vs indices over 3yrs
Source: FE Analytics
It holds 27 to 28 Peruvian stocks, is domiciled in the US and has a total expense ratio (TER) of 0.59 per cent.
FE’s head of research Rob Gleeson has tipped it as a fund he is using in his own ISA to give him access to a high-growth region with low correlation to the major markets.
BlackRock European Absolute Alpha
This £39m absolute return fund is one of the few to have made money in every calendar year since launch. In 2011 when the FTSE All Share fell 3.46 per cent, it made 5.69 per cent.
Over the past three years it has displayed a correlation of just 0.01 to the FTSE All Share.
Performance of fund vs index over 3-yrs
Source: FE Analytics
It has yet to receive the attention given to the biggest fund in the IMA Absolute Return sector – Standard Life GARS – perhaps because it invests in unfashionable Europe.
However, over three years it has made a respectable 17.14 per cent, putting it among the top quartile of funds in the sector.
It requires a minimum initial investment of £500 and has a TER of 1.74 per cent.
CF Eclectica Absolute Macro
This is another absolute return fund, managed by the famously bearish Hugh Hendry using a long/short strategy often employed by hedge funds.
The fund has extensive bond and currency positions as well as 31.7 per cent exposure to commodities.
In his most recent note to investors, Hendry wrote: "We believe the best antidote to the present low risk aversion seen across today's capital markets is to diversify across risk assets."
CF Eclectica Absolute Macro has displayed a correlation of -0.21 to the FTSE All Share over the past three years, with an annualised volatility of 6.13 per cent, less than half the 16.29 per cent of the index.
Performance of fund vs index over 3yrs
Source: FE Analytics
The fund has made 13 per cent since launch, according to data from FE Analytics, while the FTSE All Share has made 30.86 per cent.
It is available with a minimum initial investment of £5,000 and has a TER of 1.88 per cent.
CF Miton Special Situations
FE Alpha Manager Martin Gray and James Sullivan’s portfolio also has a negative correlation to the FTSE All Share, of -0.21 compared with the 0.91 of the IMA Flexible Investment sector.
The managers’ bearishness has caused them to underperform against their peers over the past year as markets have risen.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Rather than move into equities, they have retained a high level of exposure to the money markets, using the 28.5 per cent in those assets to make currency plays, largely on the strength of the dollar.
CF Miton Strategic Situations is a fund of funds, with exposure spread globally and across asset classes.
The TER is 1.73 per cent and the minimum initial investment is £1,000.
BlackRock Gold & General
FE Alpha Manager Evy Hambro’s £2.6bn fund has displayed a correlation of just 0.22 to the FTSE All Share over the past three years, according to data from FE Analytics.
It has not been a good period for investors in the mining sectors, and the fund is down 26.1 per cent over 12 months, according to FE Analytics data.
Over three years, the fund has lost 13.54 per cent, although it has been up by more than 35 per cent at certain points during the period.
Performance of fund vs index over 3yrs
Source: FE Analytics
This high volatility is one of the drawbacks of investing in commodities; however, funds such as these could be hugely beneficial to investors during a market sell-off, as they have a low correlation to bonds and equities.
BlackRock Gold & General is available with a minimum initial investment of £500 and has a TER of 1.75 per cent.
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