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Markets are tanking: So these are the funds experts are eyeing up

29 June 2015

Greece is teetering on the edge of leaving the eurozone, but many industry professionals are seeing this as an opportunity to buy – not to sell.

By Joshua Ausden,

Head of FE Trustnet Content

Equity markets across the world have taken a hammering today as Greece shut down its banks ahead of a widely expected debt default.

Greece is due to make a €1.6bn payment to the International Monetary Fund (IMF) on Tuesday, but the European Central Bank’s refusal to increase emergency funding has edged the ailing nation closer to a possible exit from the eurozone.

The FTSE 100 opened more than 2 per cent down earlier today and dropped to 6,600, but has since recovered to 6,650 at time of writing. It hit a high of more than 7,100 in April, but worries over the eurozone have seen it fall considerably in recent weeks.

It’s been even more brutal for continental Europe. At one point this morning both the Euro Stoxx and Dax were more than 4 per cent down in sterling terms. The Hang Seng and Nikkei 225 closed 2.61 and 2.88 per cent in the red, respectively, while the S&P 500 is projected to fall around 2 per cent when it opens later today.

Performance of indices over 3months

 

Source: FE Analytics

The above graph doesn’t include today’s stock market movements.

On top of worries over Greece, today has been the first chance for markets to react to Friday’s terrorist atrocities while worries remain over the imminent raising of interest rates in the US.

While a Greek default would have far reaching consequences in Europe, Fidelity global chief investment officer of equities Dominic Rossi says it’s important for investors to remember that the country makes up only a very small of the global equity market.

He thinks that today marks the climax of worries over Greece and expects other issues to take centre stage for the rest of the year.

“I think we are witnessing the maximum level of concern about Greece today,” he said. “Soon though, investors in New York and Beijing will be thinking about more local issues such as the prospect of a Fed rate hike in September and further rate cuts in China.”

“These decisions are more likely to have a profound impact on equities than the concluding chapter of a well-documented Greek default.”

AXA Wealth head of investing Adrian Lowcock (pictured) says it often proves a good time to buy when markets and companies sell-off indiscriminately – even those that have no ties to the issue in question. Given how violent the reaction has been to the Greek situation, however, he recommends that investors put their money to work slowly.

“Such sell-offs provide opportunities for investors to pick up their favourite managers and funds at lower levels and more attractive valuations,” he said. “However, this is new ground and the uncertainty could drag on for a long time.”

“It is impossible to know where the bottom will be so investors should focus on the long term and look to drip feed money slowly.”

Lowcock says investors could use the recent volatility to top up exposure to managers that tend to fall further during difficult periods, but rebound more strongly when things pick up. He highlights Richard Buxton as a prime example.

“In the UK I like the Old Mutual UK Alpha fund. Buxton’s contrarian style means he is focused on the long term,” he said.


 

“He is highly skilled at identifying value. His focus on underappreciated sectors tends to lead to periods of underperformance, particularly in falling markets. However for the long-term investor Buxton’s skill and patience is likely to pay-off.”

Buxton has run the £2.2bn Old Mutual fund since December 2009. Over that period he has delivered top quartile returns of 92.76 per cent.

Before joining Old Mutual, he ran the Schroder UK Alpha Plus fund between 2002 and 2013, again achieving sector-topping performance. FE data shows he achieved top quartile returns every year the FTSE rose, but bottom quartile returns every time it fell.

 

Source: FE Analytics

Lowcock also likes the Standard Life Investments UK Equity Unconstrained fund, which recently lost lead manager Ed Legget to Artemis, for very similar reasons.

Like Buxton, Legget has historically performed best following market sell-offs, as shown by his stellar performance in both 2009 and 2012, when he made 99.17 and 44.14 per cent respectively.

While Lowcock acknowledges that losing the manager is a big blow, he’s reassured that it’s been taken over by Wes McCoy, who ran the fund prior to Legget between September 2005 and April 2008.

Standard Life Investments UK Equity Unconstrained was a top quartile performer over the period, returning 50.84 per cent compared to 18.06 per cent from the UK All Companies sector average and 20.7 per cent from the FTSE All Share.

Performance of fund, sector and index under Wes McCoy

 

Source: FE Analytics

“The fund will continue using its ‘focus on change’ philosophy and will continue to draw from Standard Life’s ‘winners list’.  This fund has no benchmark constraints and is run on very high conviction philosophy,” said Lowcock.  

Investors with a particularly strong stomach for volatility may wish to directly buy into a European fund. Given that European companies have much stronger ties with the situation in the eurozone and Greece, Lowcock recommends a manager with more of a focus on protecting against downside risk.

“European markets have been hit harder by this and may take longer to settle and recover. Therefore I would also focus on a manager who doesn’t chase short-term fluctuations such as Vincent Devlin, manager of the BlackRock Continental European fund,” he said. 


“He focuses on fundamental stock analysis and looks for companies that offer higher earnings than the average for the market. He is a very flexible manager who is focused on managing the risk in his portfolio.”

Performance of fund, sector and index since March 2008

 

Source: FE Analytics

BlackRock Continental European has returned 92.57 per cent since Devlin took over in March 2008, putting it in the first quartile of its sector.

He has a strong record in both up and down markets, protecting much better against the downside when markets tanked post-Lehman crisis and returning more when markets then rebounded.

The fund performed in line with its FTSE World Europe ex UK index during the eurozone crisis in 2011 and has overall been slightly less volatile since he took over.

Devlin has significant underweights in France, Switzerland and Germany, whereas Italy, the Netherlands and Ireland are overweights. As of the end of May he had no exposure to Greece whatsoever.

Whereas Lowcock is leaning towards products that are likely to profit from a rebound in risk assets, other experts are exercising a higher degree of caution.

Ryan Hughes, fund manager at Apollo Multi Asset Management, believes equity markets will continue to struggle in the near term and is choosing the £9.8bn Newton Real Return fund as a result.

“Market instability is likely to persist for the summer and beyond in both equity and bonds markets,” he said. “With the Greek crisis, China slowdown and the US rate rises, there are a number of issues in their own right that have the potential to create volatility.”

“The multi-asset approach by Newton and its focus on capital preservation give the fund the flexibility to navigate through periods such as this. They have a robust approach to risk management which is key at times of heightened volatility.”

“The strategy acts as a good diversifier within a portfolio of equity and bond funds,” Hughes added.

Newton Real Return has 58.8 per cent in equities including over 20 per cent in Europe. However, manager Iain Stewart has looked to offset this risk with a short position in the S&P 500, as well as a sizeable allocation to gold, cash and bonds.

The fund has a higher correlation to the MSCI World index than many absolute return funds, but a score of 0.75 over a three-year period means it is significantly less correlated to global equities than the majority of equity funds. It has an even lower correlation to bonds over the period.

Performance of fund and indices over 3yrs

 

Source: FE Analytics


Ben Willis, head of research at Whitechurch Securities, highlights Premier Defensive Growth as another sound option for risk-averse investors.

“Within our lower risk portfolios, a consistent fund which grinds out low risk returns and which enables us to take on more risk elsewhere is Premier Defensive Growth,” he said.

“The fund is managed by Paul Smith, who focuses on constructing a multi-asset portfolio with the lowest possible risk profile that can generate a positive return over a 12-month period”

“Risk control is Smith’s first concern aided by his near-term 12-month time horizon. Given this approach, many investment ideas are rejected if Smith cannot find the lowest risk way of applying it within the portfolio and/or cannot predict or understand the risks involved.”

“Because of the diverse nature of the asset base a certain amount of trust must be placed with the manager but his track record shows that he has been adept at meeting the fund’s low risk/positive return criteria.”

Smith has run the £297m fund since its launch in December 2010. It’s made a positive return every calendar year since then, delivering 18.97 per cent overall with a fraction of the volatility of equities. 

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