The global sell-off across markets is no more than a “crisis without a crisis”, according to Rathbones’ David Coombs (pictured). 
The fund manager remains unperturbed by the market volatility experienced over the last fortnight, deeming it as short-term noise and seeing it instead as a buying opportunity.
On 24 August, markets across the globe plummeted partially as a result of growth concerns surrounding China. By close of the session, the FTSE 100 had £74bn wiped from its value and the Dow Jones ended the day down 588 points.
Performance of indices in August 2015
Source: FE Analytics
“We look back at taper tantrums or Lehmans or the dotcom bubble or Greek debt drama and there’s usually some kind of underlying crisis that creates this sort of panic,” Coombs said.
“The fact is that [the sell-off] happened in August and volumes were relatively low, and I think high frequency traders have had a bigger impact on the market than maybe they do at other times.”
“I don’t understand why the fact that China is slowing is creating this effect. Everyone knew China was slowing. Most big corrections are due to a shock and I don’t know what the shock is here.”
The volatility the markets are showing at the moment is therefore nothing more than short-term sentiment, according to Coombs, which doesn’t factor into his long-term investment views.
“If I look fundamentally at corporate profits and where they’re likely to be in the next 12 months to 36 months, then my view is that they will be in good shape. That’s what I’m focused on and I see this as an opportunity,” he continued.
As such, the manager has increased his exposure to various markets and has taken advantage of the cheap valuations to buy into his two highest-conviction markets in Rathbone Strategic Growth Portfolio, which are Japan and the US.
While most of his buying last week was centred on developed markets, Coombs decided to steer clear of increasing his exposure to UK equities.
“The FTSE is dominated by oil and commodities so, typically, if you add to UK funds you’re adding to funds that are overweight mid- and small-cap, and they haven’t sold off as much as large-cap,” he explained.
Performance of indices in 2015
Source: FE Analytics
“It made more sense for me to add to the US. The dollar was also underperforming in the early part of last week which I found very peculiar, so adding to the US made sense on two levels. One because the dollar was underperforming the fundamentals, which seems to have moved back around this week thank goodness, so I was adding to the dollar and the US equity market which is my favourite economy.”
Coombs says Japan experienced a significant sell-off because it is in Asia and is a beneficiary of Chinese growth.
Not only this, he adds that many companies in Japan have broad global networks, which means the stocks are better shielded from regional headwinds.
He increased his exposure to the JPMorgan Japanese Investment Trust, which is co-managed by Nicholas Weindling and Shoichi Mizusawa. While it is in the bottom decile over five years, the trust is currently trading at a 10.8 per cent discount.
On the opposite end of the scale, the manager upped his exposure to China and wider emerging markets.
“I’ve added a small amount to China as there’s obviously been a huge sell-off there. I’m trying to look at the region on a three-to-five year view and I don’t think anything has fundamentally changed,” he said.
“Our core thesis over the last 18 months to two years has been that China will eventually slow to about 3.5 to 4 per cent [growth], we think that’s a more realistic annualised rate over the longer term.”
“Obviously we don’t know how quickly we’re going to get there, but given the size of the economy it can’t grow at 8 per cent mathematically over the next 50 years, it’s unrealistic.”
Coombs suspected the push for drastic economic reforms in China would unnerve the markets, following an announcement from the government last month that it would formally allow its pension fund to invest in the stock market.
“There were going to be bumps in the road and that’s what we’re seeing. Do I think it’s a fundamental failing in the Chinese economy? Absolutely not. What we’re going through is part of that difficult transition. It’s always going to be difficult and therefore I’m trying to look through that,” he said.
The manager also added to Asia as a whole last week through the five FE Crown-rated Veritas Asian fund, which has been managed by FE Alpha Manager Ezra Sun since its launch in 2004.
“I’ve been invested in Ezra for decades and I think he’s a very experienced manager, I like his investment style. Yes he has periods of underperformance but who doesn’t. Over the long term, he’s provided outperformance for me,” Coombs said.
Since its launch, the £465m fund has achieved a total return of 277.93 per cent, outperforming its average peer in the IA Asia Pacific Excluding Japan sector and its MSCI AC Asia Pacific ex Japan benchmark by 105.99 and 105.29 percentage points respectively.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
The fund, which has also achieved a top-decile annualised volatility, Sharpe ratio and maximum drawdown over the same time frame, has a total expense ratio, including a 20 per cent performance fee, of 1.22 per cent.
Coombs has also slightly increased his exposure to the Genesis Emerging Market trust, which is in the bottom decile over 10 years and the third quartile over five.
Managed by Andrew Elder since 2004, the two FE Crown-rated trust is currently trading on an 11.7 per cent discount and has an ongoing charges figure including performance fee of 1.67 per cent.
“I’m still worried about the effect of falling commodity prices on emerging markets and the effect this will have on balance sheets in various countries such as Brazil and South Africa,” Coombs admitted.
“I think central banks in these regions still have a relatively short track record in managing an economy that doesn’t have the tailwind of a strong bull market in resources revenues.”
“I do think the potential policy error for emerging markets is quite high and that’s why I have no emerging market debt exposure. When I was adding to emerging markets, I was adding to a very, very small position. Currently, we have a 1.5 per cent weighting.”
In addition, Coombs has increased his exposure to certain markets though ETFs, as he believes they are good for easily rebalancing his portfolio during periods of volatility. Currently, he holds Dax, Spanish, Mexican, UK and US ETFs.
“That’s not a strategic position – when markets are very volatile, particularly as we’ve been seeing over the last few weeks, I tend to use ETFs more because you’re trading at a live price at that time of the day rather than dealing blind as you often are with a fund,” he explained.
“The only problem I’ve had is that liquidity, particularly in some UK ETFs, has been quite poor and spreads have been quite wide so you’ve got to be very careful.”
“My ETF exposure always go up during market volatility and, when things settle down, I start to move back into active management again.”
Coombs’ Rathbone Strategic Growth Portfolio, which is £94m in size and is in the IA Unclassified sector, has returned 20.73 per cent over three years, in line with its UK consumer prices index plus 5 per cent return target.
It also has a clean OCF of 1.54 per cent.
In terms of his overall performance across the four funds he manages, our data shows Coombs has outperformed his peer group composite by 8.39 percentage points since he began managing his first fund at Rathbones.
Performance of manager vs peer group composite
Source: FE Analytics
