Investors will be closely following the words of US Federal Reserve chairman Jerome Powell during the Federal Open Market Committee meeting on 22 September to figure out how the central bank will unwind its quantitative easing and easy monetary policy.
However, global financial markets do not have the best track record of reacting to hawkish central bank comments. In 2013 and 2018, markets fell on similar – albeit not exactly the same – concerns as those that exist today.
The 2013 ‘taper tantrum’ was a sell-off in equities and US government bonds after the Fed announced its plans to taper quantitative easing.
MSCI World during 2013 taper tantrum
Source: FE Analytics
One takeaway from the taper tantrum of 2013 was that both bonds and equities experienced negative returns, upending the generally accepted theory that there is a negative correlation between bonds and equities – still the foundation of many portfolios today.
There is some concern that when the Fed starts tapering again, it could cause a similar correction in the stock market.
Sébastien Galy, senior macro strategist at Nordea Asset Management said: “The reason the market is so concerned about Fed tapering is because it could start to reverse some of the gains of quantitative easing at a time when many assets are expensive and leverage is elevated.”
This time, however, the announcement of tapering is unlikely to create a large shock in the market because investors have had a long time to prepare. Galy added “the real shock will come when the debate on Fed rate hikes starts”.
Gero Jung, chief economist at Mirabaud Asset Management, also said that market expectations around interest rates will be crucial. He noted: “Any signals on possible changes in Fed policy might have an even more important market impact than the specific timing of tapering.”
Although not quite a taper tantrum, the Fed raised interest rates four times in 2018, a turbulent year for global markets where yields rose sharply as bonds sold off and equities fell alongside them. All the gains the stock market made in the first nine months of the year were completely wiped out in the final three months.
Performance of MSCI World in 2018
Source: FE Analytics
Although past performance is not an indicator of future results, there are a few global funds that managed to stay ahead of the peer group in terms of performance in both 2013 and 2018 – the years when markets jittered on concerns similar to the current climate: the withdrawal of quantitative easing from central banks and interest rate hikes.
Below are the global funds with managers who delivered top-quartile returns in both 2013 and 2018.
Source: FE Analytics
One notable trend is that most of the funds follow an investments style that could be characterised as quality growth.
These include the £8.8bn Lindsell Train Global Equity fund run by FE fundinfo Alpha Managers Michael Lindsell and Nick Train as well as co-manager James Bullock. Others include giant global equity funds such as the £15.9bn Morgan Stanley Global Opportunity fund and the £8.1bn Wellington Global Quality Growth fund.
One thing these portfolios have in common is a bias towards companies that have strong competitive advantages that enable them to grow their earnings regardless of economic conditions and while also having key factors that act as barriers to entry for new competitors.
Most of these quality growth funds have between 40 and 80 stocks, with top-10 positions in large-cap technology companies such as Amazon, Adobe and Alphabet.
However Lindsell Train Global Equity differs in that it runs a more concentrated portfolio of just 20 to 35 holdings, with none of the big US technology stocks present in its top-10.
Another notable trend was the presence of two funds focused on investing in the health care sector – the £537m Schroder Global Healthcare fund and £3.4bn Wellington Global Health Care Equity fund.
Companies involved in the medical and healthcare industries are generally seen as more defensive stocks to hold during times of economic uncertainty, which helped the outperformance of these two funds during the two periods.
One outlier in the table was the presence of one fund with a value-tilt – the £467m JOHCM Global Opportunities fund run by Ben Leyland and Robert Lancastle.
These managers take a high conviction approach to holding quality companies that are in growth areas but are still undervalued by the wider market. These include companies such as Italian energy company Enel, Anglo-American miner Rio Tinto and multinational tobacco company Philip Morris.