Rising concerns about the Delta variant, China’s regulatory shake-up and shifting monetary policy are several reasons why investors could be headed for a more volatile September, so which funds could help manage it?
September has historically been a more volatile month in markets, as Bestinvest managing director Jason Hollands noted.
Looking back at the past 40 years, September was the only month when average share price returns have been negative, according to Hollands’ data. It is also a period where 53% of the time markets have finished up lower than where they started.
Nigel Green, founder of deVere Group, said there could be three main triggers for this year’s “autumnal volatility”.
First, concerns over a Delta variant could prompt the return of Covid restrictions, which could cause markets to pull-back due to anticipated slower economic growth.
“Investors will be thinking that the complete pandemic recovery might take a bit longer,” Green said.
The second reason could be China’s new regulatory crackdown and its “increasing push for control of private enterprise.”
This stance could “ripple through global markets” moving into September, Green said, causing volatility to spike.
Finally is changing monetary policy, specifically around central banks’ Covid stimulus packages. If this were to end, markets could throw a “taper tantrum” as the sizeable stimulus packages deployed during the pandemic has supported rallying asset prices.
“After an impressive year, the current bull run in stock markets is likely to continue, however the landscape will become increasingly turbulent,” Green said.
Although Green said investors should “buckle up [and] remain invested”, some might want to make sure their portfolios had adequate protection. With this in mind, Trustnet asked a variety of fund pickers what could help combat this potential volatility.
Liontrust Special Situations
For Hollands, Liontrust Special Situations is his pick if investors want to not only defend against volatility but take advantage of the opportunity to add some equity exposure.
The managing director cautioned that he didn’t advocate making major portfolio changes based on a one-month view of markets, especially when investing in equities.
But if investors did take a more cautious view going ahead, he recommended some UK exposure. Against a backdrop of indices at record highs and expensive valuations, “UK equities are an outlier with reasonable valuations”, Hollands said.
The £6.5bn Liontrust Special Situations fund in particular has relatively low volatility while outperforming over the long term, he added. The fund’s 10-year volatility is top quartile at 11.73%, better than the IA UK All Companies sector average (13.58%) and its FTSE All Share benchmark (12.47%). Its 10-year returns are also top quartile, the 16th best in the sector for that timeframe.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
FE fundinfo Alpha Managers Anthony Cross and Julian Fosh also have a strong track record in falling markets, Hollands said.
“Our analysts indicates that they have outperformed 83% of the time in down markets,” Hollands said.
This defensive quality is a “vindication” of their Economic Advantage investment process. This process seeks out companies with one of three intangible assets: intellectual property, strong distribution or recurring business (at least 70 per cent of annual turnover).
Holding stocks with these qualities means the portfolio overall is “more resilient to changes in the economic cycle”, Hollands said.
The fund holds an FE fundinfo Crown Rating of five and has an ongoing charges figure (OCF) of 0.82%.
TM Fulcrum Diversified Absolute Return
The second pick is TM Fulcrum Diversified Absolute Return, chosen by Rory Maguire, managing director of Fundhouse.
Maguire said this was a fund that investors might consider if they generally think “risk assets are feeling heavy, as they appear to be today”, not just for the next month.
Maguire acknowledged that any absolute return fund “may not always perform well in a sell-off”, despite this type of fund deemed an all-weather proof option.
Absolute return strategies aim to deliver positive returns regardless of the market environment. But they have generally lagged in the post-global financial crisis environment, where the liquidity-fuelled bull market caused equities to surge.
But the Fulcrum investment team running the fund has a “unique process,” according to Maguire, which creates a good balance between risk taking and downside management. This has resulted in outperformance over 10-years versus the IA Targeted Absolute Return sector, shown below.
Performance of fund vs sector over 10yrs
Source: FE Analytics
TM Fulcrum Diversified Absolute Return holds an FE fundinfo Crown Rating of four and has an OCF of 1.17%.
iShares US Treasuries ETF
The next pick is a seemingly “dull” option, according to 8AM’s Andy Merricks, but one that has historically held firm during higher market volatility: US treasuries. He uses the iShares US Treasuries ETF for exposure.
“As I say, exceedingly dull but it’s very difficult to find anything that is truly defensive at the moment and which won’t get caught up in any market volatility if and when it arrives,” Merricks said.
US treasuries have “nearly always” acted as a good defence against equity market volatility, he added.
This asset has had a tough ride the past 18 months. US treasury yields spiked sharply earlier this year but have been gradually declining since. But they still offer positive, if small, yield over their German, UK or Japanese counterparts, Merricks said.
For him, this indicated that there is room for US yields to fall further in comparison to other bond options, which means that they are simultaneously a “better best for risk averse investors than their counterparts”.
Merricks added that even if treasury yields do increase again, this will likely cause volatility in equity markets so it makes sense to hold the passive iShares US Treasuries ETF as a defensive play when markets sell off.
“We can’t predict when shocks will occur, but we can predict with some certainty that each day that passes is one nearer the next shock,” Merricks concluded.
The $15.4bn ETF has beaten its sector over 10 years.
Performance of fund vs sector over 10yrs
Source: FE Analytics
It has an OCF of 0.15%.
Uncorrelated assets
The last recommendation is less of a fund pick but more portfolio construction tip.
Daniel Lockyer, senior fund manager at Hawksmoor, said he doesn’t hold single fund purely for insurance of hedging purposes in the firm’s multi-asset portfolios. Instead, the focus is on holding “uncorrelated assets that have asymmetric risk reward payoffs”, meaning they can participate in rising markets and not give it away in falling markets.
Lockyer runs the MI Hawksmoor Global Opportunities, MI Hawksmoor Distribution and MI Hawksmoor Vanbrugh funds with co-managers Ben Mackie and Ben Conway. The funds invest in both open- and closed-ended structures.
Some of the uncorrelated assets they hold include a basket of investment trusts, containing digital infrastructure (Digital 9 Infrastructure), shipping (Tufton Oceanic Assets and Taylor Maritime) song royalties (Hipgnosis Songs, Round Hill Music), and secure income REITs like those focused on supermarkets (Supermarket Income REIT) or healthcare properties (Impact Healthcare REIT).
One thing all of these trusts have in common is high income yields, a “comfort” in down markets as the dividends can be covered by underlying revenues.
Taking song royalties as an example, Lockyer said the demand for streaming generally has created a growth opportunity in an asset uncorrelated to mainstream assets.
“We will listen to music regardless what happens to stock markets,” he said.