However, experts are saying the dip is an excellent buying opportunity for investors, especially if they missed out on the rally in the early part of the year.
Charles Stanley Direct’s Rob Morgan says he is looking to pick up holdings in out-of-favour areas of the market, ready to take advantage of a bull run if and when it comes through later this year.
"The answer is different if you think the market is going to keep coming down," he said.
"But I would be looking to add a bit of risk to portfolios now, although we might still see a period of consolidation over the summer, the market looks like it could go up from here."
Morgan (pictured) tipped five funds in particular to take advantage of the dip.
Standard Life UK Equity Unconstrained
Morgan says Standard Life UK Equity Unconstrained would be one of the best funds to hold if the market suddenly takes off again.
"It is a very highly cyclical fund and it tends to outperform when the market rises," he said. "However, it doesn’t hold up well when the market falls."
The £590.8m Standard Life UK Equity Unconstrained fund, managed by Ed Legget, was the best-performing portfolio in the IMA universe in the rising markets of 2012.
| Name | Standard Life UK Equity Unconstrained |
|---|---|
| Fund size | £590.8m |
| Min. investment | £1,000 |
| Ongoing charges | 1.90% |
| Yield | 0.56% |
| Manager | Ed Legget |
| Crown rating | 2 Crowns |
Source: FE Analytics
The fund has also outperformed the IMA UK All Companies sector, its benchmark, over one, three and five years.
Since launch in September 2005, the fund has picked up 220 per cent, compared with 50.1 per cent from the sector and 54.46 per cent from the FTSE All Share.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund is heavily invested in industrial stocks, with nearly 40 per cent of the portfolio in the sector. The second-highest weighting is to financials, with Lloyds among its top-10 holdings.
First State Global Emerging Markets Leaders
Although First State has said it is soft-closing its outperforming Global Emerging Markets Leaders fund, Morgan encourages investors to pick it up while they still can.
"Emerging markets are already potentially quite oversold, particularly Latin America and China," he said.
"I’d be looking to add to First State Global Emerging Markets Leaders while it is still available."
| Name | First State Global Emerging Markets Leaders |
|---|---|
| Fund size | £5.1bn |
| Min. investment | £1,000 |
| Ongoing charges | 1.58% |
| Yield | 0.30% |
| Manager | Jonathan Asante & FE Alpha Manager Glen Finegan |
| Crown rating | 5 Crowns |
Source: FE Analytics
The five crown-rated First State fund has been one of the best performers in the IMA Global Emerging Markets sector over one, three and five years.
Over the last five years it has gained 78.58 per cent compared with 13.8 and 15.74 per cent from its sector and MSCI Emerging Markets benchmark respectively.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
FE Alpha Manager Glen Finegan and Jonathan Asante have tilted the portfolio towards consumer products, with major consumer brands such as Unilever, Coca-Cola and SAB Miller in the top-10 holdings.
Lazard Emerging Markets
Another fund that Morgan likes in the out-of-favour emerging markets space is Lazard Emerging Markets.
"It’s a bit more growth-oriented than the First State fund, so it has suffered," he said.
"It’s a well-managed fund, although its growth bias has not held up well in the latest downturn. But I’m quite keen on adding this one."
The four crown-rated Lazard Emerging Markets fund is run by veteran emerging markets manager James Donald.
| Name | Lazard Emerging Markets |
|---|---|
| Fund size | £444.7m |
| Min. investment | £2,000 |
| Ongoing charges | 1.57% |
| Yield | 2.10% |
| Manager | James Donald |
| Crown rating | 4 Crowns |
Source: FE Analytics
The fund has outperformed the sector and index over one, three, five and 10 years.
Over the last decade it is up 342.42 per cent, compared with 258.27 and 268.54 per cent from the IMA Global Emerging Markets sector and MSCI Emerging Markets index.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Although the fund lost more than 50 per cent of its value in the financial collapse of 2008, it protected better against the downside than its peers, delivering top-quartile returns. It also rebounded strongly in 2009 and 2010 and shielded its capital more effectively in the down markets of 2011.
Aberdeen Global Chinese Equity
Morgan says one of the most undervalued areas of the developing world is China, where negative news has spurred an unfounded sell-off.
"China has been underperforming for many, many months. Now we’re hitting valuations that look quite interesting," he said.
Morgan likes the Aberdeen Chinese Equity fund because he says the management team is very selective about its holdings, which helps to alleviate fears about corporate governance in the leading Asian economy.
| Name | Aberdeen Global Chinese Equity |
|---|---|
| Fund size | $3.4bn |
| Min. investment | £1,500 |
| Ongoing charges | 1.96% |
| Yield | N/A |
| Manager | Asian Equities team |
| Crown rating | 5 Crowns |
Source: FE Analytics
"It pays to be selective, and that’s why I chose the Aberdeen fund. They are very fickle and careful about which companies they hold. If it makes it into an Aberdeen portfolio, you know the corporate governance has got to be good."
"I’ve not owned a specifically Chinese fund for a long time, but I think I’m ready to take the plunge," he added.
Over five years, the five crown-rated fund has made 48.7 per cent compared with 26.6 per cent from the IMA China/Greater China sector and 30.09 per cent from the MSCI Zhong Hua index.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
BlackRock European Dynamic
Morgan says investors may also want to look to Europe, where valuations are cheap and quality companies can outperform over the long-term.
He likes the BlackRock European Dynamic fund, headed up by FE Alpha Manager Alister Hibbert.
"It’s still undervalued compared with other markets. I’m more comfortable there than in the States because it comes with better valuations."
| Name | BlackRock European Dynamic |
|---|---|
| Fund size | £1.7m |
| Min. investment | £500 |
| Ongoing charges | 1.67% |
| Yield | 0.55% |
| Manager | FE Alpha Manager Alister Hibbert |
| Crown rating | 5 Crowns |
Source: FE Analytics
The five crown-rated portfolio has beaten both the sector and FTSE Europe ex UK index over one, three five and 10 years.
Over five years it has made an impressive 63.57 per cent compared with 16.87 per cent and 12.61 per cent from the sector and index respectively.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
