Skip to the content

Funds to hedge against the turmoil in Iraq and Ukraine

03 September 2014

Canaccord Genuity’s Justin Oliver has been upping his exposure to energy funds, an aerospace and defence ETF and the US dollar to hedge his portfolio against the possibility of further instability in the Middle East and Ukraine.

By Alex Paget,

Senior Reporter, FE Trustnet

The ongoing conflicts in the Middle East and the tension between Russia and the West over Ukraine have dominated the headlines recently, with nearly every fund manager report over the past month or so referring to the headwind of “geo-political” risk.

ALT_TAG Most managers have cited the instability as a reason to raise cash, fearing that if tensions were to escalate it could cause the already stretched equity market to correct.

Justin Oliver, investment director at Canaccord Genuity, agrees that now is the time for investors to start making changes to their portfolios as he believes equity market risk is turning increasingly to the downside.

“We made a few changes in August, which is quite unusual,” Oliver (pictured) said.

“We just felt that it was time to reduce risk a little bit further and the reasons for that are quite obvious really, such as the geo-political backdrop.”

However, Oliver isn’t raising cash.

While he has chopped down his exposure to Europe, technology and healthcare, he has used those profits to up his weighting to areas that should actually benefit from heightened geo-political tensions.


Firstly, given that Russia and the Middle East are big energy exporters, Oliver has been buying funds that give him exposure to the oil price.

“We haven’t necessarily reduced our equity exposure because we have incorporated number of other sectors into the portfolios,” he explained.

“For instance, we have added to energy. The reason behind that is that we don’t know what will drive a pull-back in the market. However, if tensions continue to increase then a spike in the oil price could be one of them.”

Though the price of oil has actually fallen over recent months, Oliver sees it as a good hedge.

He added: “The sector still has valuation support and there is a lot of dollar earnings, which also helps.”

To give him that exposure, Oliver has bought the £170m Investec Global Energy fund.

The portfolio, which is now managed by Charles Whall and Tom Nelson, is effectively an oil fund offering investors exposure to oil and gas exploration and production, equipment and services, drilling and refining companies.

According to FE Analytics, Investec Global Energy, which sits in the IMA Specialist sector, has returned 179.8 per cent since its launch in November 2004, beating its benchmark – the MSCI AC World Energy index – by 24.56 percentage points.

Performance of fund vs index since Nov 2004


Source: FE Analytics

However, Whall and Nelson have failed to beat their benchmark over one, three and five year periods. Its medium-term numbers have been hurt by the fund’s losses of more than 12 per cent in 2011.

Investec Global Energy clean ongoing charges figure (OCF) is 0.87 per cent.

Other IMA funds that operate in the space are Artemis Global Energy, Jupiter Global Energy and MFM Junior Oils.

Aerospace and defence

One of Oliver’s other more esoteric positions is in aerospace and defence.

Oliver says if the US is forced to intervene further in Iraq against Islamic State, it is a sector which would likely receive a boost.

“There could also be a more of a long-term theme here because as China continues to grow, so will their military capability so we could see the US giving more focus to the Asia. However, in the short term if there is more instability then we would expect the sector to do well,” Oliver said.

According to FE Analytics, the FTSE World Aerospace & Defence Index has returned 93.21 per cent over three years, but has had a volatile year so far this year and has returned 0.30 per cent in 2014.

Performance of indices over 3yrs


Source: FE Analytics

He has bought a US domiciled exchange traded fund [ETF] for that exposure, but Canaccord Genuity is in talks with the provider to launch a LSE-listed version.

There are various ETFs in the space available to investors and one of FE’s top rated is the $292m iShares Dow Jones US Aerospace & Defence Index; which has five FE crowns.

It has a total expense ratio (TER) of 0.47 per cent and offers investors exposure to blue-chips such as United Technologies, Boeing and Lockheed Martin.

US dollar exposure but no gold

One of the other hedges Oliver is using is the US dollar, which he expects to strengthen as the market becomes increasingly focused on rising interest rates in the US when QE eventually finishes this year.

He also says if rising tensions in the Middle East and Ukraine do cause a sell-off in equities, the dollar has historically performed well as investors look to de-risk their portfolios.

To take advantage of that, he is holding a lot of his cash weighing in dollars, gaining more exposure to dollar-denominated bond funds and investing in companies that have dollar earnings.

While gold, like oil, is seen as a real safe-haven asset class during times of extreme geo-political risk, he is avoiding the precious metal.

“It’s something we talked about quite extensively,” he said. “We don’t really have the conviction that gold will act like the safe-haven asset it has been in the past because its safe-haven characteristics have broken down recently. I think the dollar will strengthen, which hasn’t been a good sign for gold in the past.”

The lacklustre performance of gold bullion over recent months while tensions have increased has baffled a number of experts.

Performance of gold over 3 months


Source: FE Analytics

Adrain Ash, head of research at Bullion Vault, says that demand for the precious metal fell to a four-year low in August despite the US’s military action in Iraq.

"History shows gold offers financial insurance, not a speculation on other people's troubles. Despite this summer's geo-political headlines, safe haven demand for gold has so far been notable by its absence. Prices remain unmoved by the news from Iraq, Gaza and Ukraine,” Ash said.

Oliver expects the demand for gold will continue to be low for some time to come.

“We just don’t think the outlook for gold is that appealing, especially when you look how it has performed in the past when real interest rates in the US have gone up.”


Editor's Picks


Videos from BNY Mellon Investment Management


Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.