A number of industry figures have told FE Trustnet in recent weeks that they are finding it increasingly difficult to forecast what way the market is going, with one high-profile fund manager admitting that he had absolutely no idea whether the FTSE would be higher or lower by the end of the year. To deal with this, Burdett, co-head of multi-manager at F&C alongside Gary Potter, says investors should seek out funds that are not susceptible to the vagaries of a jittery market.
The pair recently picked up Morgan Stanley Diversified Alpha Plus for exactly that reason.
"It has a beta of about half the market so you get some exposure to the market, but it’s influenced by very specific views against certain sectors, countries and assets. They’re quite bearish on China at the moment, for example, and if current jitters persist, you could profit from that," he said.
Performance of fund vs index over 1yr
Source: FE Analytics
Investors with exposure to China were shocked this week by credit rating agency Fitch, which unleashed a damning criticism of the state of the Middle Kingdom’s finances.
The agency said China was hugely impaired by a credit bubble that even by debauched western standards is excessive, surprising investors who have been told for years that one of China’s great attractions is a strong middle class with no debt to hamper its consumption.
Morgan Stanley Diversified Alpha Plus uses hedge fund strategies and has a very high minimum investment. The same goes for James Hanbury’s Odey Odessey global macro fund, which Burdett also holds.
"Another route might be via absolute return funds," continued Burdett, "though lots of absolute return funds have problems when interest rates are so low."
Many funds of this type hold a lot of cash, as much as 90 per cent, with the remainder in derivatives, and they rely on that cash to support steady returns via the interest paid on it – which at times like this is minimal, causing them to struggle.
Among the best-rated absolute return funds available to retail investors are Insight Absolute Insight and Standard Life GARS. A core skill at this stage in the market cycle is to find funds that are outside the ordinary. Burdett favours the 3i Infrastructure IT, which benefits from massive government investment in public projects such as roads, schools and hospitals.
"Infrastructure might fit the bill," he said, "because it’s inflation-linked, cash-flows are predictable, and the managers are exposed only to existing infrastructure projects, so you’ve got that stability."
"There are political risks, though. The government could suddenly stop using the private sector and change legislation against these things, but that’s highly unlikely given that they’re actively seeking new projects backing the private sector – and you’re protected by the fact that the fund invests in existing projects, which are already in progress."
The 3i Infrastructure IT has had a very good run of late, with returns of 35.7 per cent over a three-year period. As the graph below illustrates, it has been largely unaffected by the recent sell-off in markets.
Performance of trust vs index over 3yrs
Source: FE Analytics
Another unusual investment on Burdett’s list is the Blue Capital Global Reinsurance IT – a closed-ended fund that invests in insurance risk.
It allows investors to diversify their risk exposure and reduce the correlation of their portfolio – with its fortunes tied to the risk of a tsunami, as opposed to a market correction.
"They use complementary risk targeting, offsetting their exposure to risk from one event in one place with exposure to another place where a risk event is unlikely to strike at the same time."
"If Hurricane Katrina, Hurricane Sandy and the Great East Japan earthquake had all struck in a single month, it would still only have taken a couple of years for this fund to have recouped its losses," he explained.
"You have risk in this fund, certainly, but it’s a different kind of risk – you could see it fall at the same time as a stock market crash, but it’s unlikely, and it certainly wouldn’t be driven by the same factors."
Burdett is negative on bonds, and has no exposure to investment grade or government debt.
"Bonds are a bit of a struggle. We’ve been out of the market for a while. Although spreads on high yield corporate debt are not at record lows, nominal yields don’t really offset the risks and could affect you if yields do back up or there’s an inflation spike."
"We’re happy to hold a bit of high yield, but that’s it."
The best thing an investor can do at the moment, according to Unicorn Mastertrust’s Peter Walls (pictured), may well be nothing.
"It’s very difficult to read the market in the short-term and if you don’t know where things are going, then as far as the market is concerned, that spells uncertainty which can lead to panic," he explained.
"The reality is that if people are uncertain, then markets tend not to go up very much, and the first rule in this environment, I guess, is don’t panic." Putting money aside so that you can use it when an opportunity arises is a key strategy at a time like this, says Walls, whose fund is close to its maximum cash exposure.
"I’m not really buying anything at the moment," he said. "The last thing I bought was TR Property, because I can see some pickup in the commercial property market, and that’s had a good run and the discount’s come in a bit."
"Apart from that, there’s a bit more cash in the portfolio, I’m close to the maximum. I don’t think there’s anything really supporting valuations at the moment."
He says investors in closed-ended funds, in particular, face a difficult time.
"It’s very difficult [for investment trusts] to outperform," he said. "All the good things are working against you – gearing accelerates any losses, discounts are widening, so what we have tried to do is shore up exposure to funds where I am sure the manager can continue with share buyback activity."
Until there is a clearer lead from the US, the market is likely to remain turbulent, Walls believes.
"We are waiting for greater clarity on the future of the US economy and its plans for further QE," he said.
Walls thinks a decline in valuations may not be a bad thing for investors.
He commented: "There’s a lot still to work out. A financial crisis takes a long time to work out of the system, and you’ve got to be patient and trust that central government will be able to finesse it."
"Whether they will be able to or not is hard to call. We’re in the middle of the biggest financial experiment in our lifetimes, and markets – which are always volatile after a shock – are going to be even more skittish because of the nature of this crisis."
