Last Thursday marked the biggest daily loss for the UK index since January and it closed at 6,440, its lowest level in 2014. It has bounced back slightly, thanks largely to a spike in bank share prices, though still stands below 6,550 at the time of writing.
Performance of indices since 8 Sep
Source: FE Analytics
For both short- and long-term investors, the recent volatility could be seen as a moderate but welcome buying opportunity.
FE Alpha Manager Giles Hargreave told FE Trustnet last week that in spite of Mario Draghi’s refusal to specify how far he’s willing to go to revive the eurozone’s faltering economy, little has changed for investors.
This, he says, makes markets more attractive than they were – plain and simple.
“There’s better value to buy good companies. Stocks are cheaper than they were two weeks ago,” he said.
Political uncertainty, worries over the economic recovery at home and in Europe, and news of the ebola crisis spreading to the US all contributed to last week’s losses. Hawksmoor’s Daniel Lockyer points out that all of these remain a threat, and further losses could occur.
He’s not the only one. Bears such as Sebastian Lyon and Marcus Brookes expect a much larger pull-back in the foreseeable future.
Here, we look at some of the options for investors looking to put their cash to work in light of the recent falls, or who are getting ready to strike if volatility persists.
If you’re looking for a cheap and easy option to take advantage of lower share prices, a tracker fund is the obvious choice.
The likes of Vanguard FTSE UK Equity Index and Fidelity Index Europe ex UK have ongoing charges of less than 0.1 per cent, and give investors direct market exposure.
Alex Brandreth, a portfolio manager at Brown Shipley, has been using passives recently to take advantage of short-term falls.
“We recently launched new multi asset funds and have been receiving significant inflows,” he said.
"While stock markets have been high we have been happy to let cash levels in the funds increase. However, when markets have fallen we have invested in a FTSE 100 tracker, allowing us access to the market at appropriate prices. Over the coming weeks we will look for opportunities to invest in specific stocks."
If you’re a keen market timer, an ETF will be even more attractive.
Vanguard FTSE 100 UCITS ETF and iShares MSCI Europe UCITS ETF are similarly priced, but allow investors instant access as they are publicly traded like any other stock.
The problem with buying a tracker, says Hawksmoor’s Lockyer, is that it doesn’t allow investors to pick up the cheapest parts of the market. UK stocks Afren and Dialight, for example, are up around 9 per cent.
He says that the resources sector has been hit particularly hard in recent weeks, which is why he is thinking about increasing his exposure to commodities and gold funds.
“We feel that the market might not be pricing in the improving management of these companies,” he said.
“If you look at Rio Tinto and BHP Billiton, the headline numbers are attractive. If similarly attractively priced companies start improving as well, it’s an interesting area.”
Performance of funds and index over 3 months
Source: FE Analytics
Lockyer already has exposure to the likes of Invesco Gold & Precious Metals, BlackRock Natural Resources Growth & Income and the BlackRock World Mining trust across his fund of funds range, and says he will most likely top up these areas if he sees further volatility.
He points out BlackRock World Mining IT, which is yielding 5 per cent, has recently gone on to a 4.2 per cent discount, having been on a premium earlier in the year.
Mark Dampier of Hargreaves Lansdown and Ben Williams of Saunderson House are instead using the pullback to increase their exposure to their favourite core funds.
Dampier says he noticed Neil Woodford’s CF Woodford Equity Income portfolio has taken a sizeable hit in recent days and used this as an excuse to top up his ISA holding.
“The way I look at it is that it’s better to buy it now than it was last week,” he said.
Performance of fund, sector and index over 1 month
Source: FE Analytics
“I have no idea whether there’s more volatility to come, but it’s good to use a pullback as an excuse. You could say we are long due a 10 per cent-plus correction, but it’s interesting to see that Wall Street bounced back so quickly.”
“The oil price has fallen quite considerably, which is a bull sign. Oil is a tax on both the consumer and governments. The UK is neither cheap nor expensive, but I always think it’s good practice to put some money back in when markets fall.”
“At my age, I’m also thinking about funds that will pay me an income. Rather than switching around my exposure, I can change out of my accumulation shares and into income shares easily.”
Dampier adds that Woodford’s proven ability at protecting against the downside is a further attraction if volatility does indeed persist.
Williams has been eyeing up two smaller funds instead, both of which sit in the IMA UK All Companies sector.
“We took some money out of UK equities a month or so ago but the recent selloff does create an attractive entry point, as it did in February,” he said.
“We’d probably look at adding back something like Threadneedle Growth & Income or JOHCM UK Dynamic, down [5.4 and 4.76 per cent] respectively over the past month.”
Performance of funds and index over 1 month
Source: FE Analytics
“We rate the managers highly, they have robust investment processes and the funds are nimble and flexible enough to exploit current volatility.” FE Alpha Manager Alex Savvides (pictured), who has headed up the £250m JOHCM fund since its launch in 2008, is a favourite with Rob Gleeson and his FE Research team.
Savvides is a value manager, targeting distressed businesses that have identified their problems and are in the process of solving them. He only invests in companies that pay a sustainable dividend, giving the fund an extra layer of stability.
One fund that may also catch the eye is FE Alpha Manager Stuart Rhodes’ M&G Global Dividend portfolio.
The £9.2bn fund’s ability to find companies with sustainable dividend growth, which tends to result in rising share prices, has made it hugely popular with investors in recent years.
It has had a tougher time of late, however, underperforming its sector and benchmark significantly in 2014 and falling almost 5 per cent since September.
Performance of fund, sector and index in 2014
Source: FE Analytics
The manager says he is disappointed by the performance, pointing to stock-specific issues in the likes of Reckitt Benckiser and mining services company ALS as being big detractors from returns.
On the upside, however, he says that the list of companies he holds are the cheapest they have been for some time relative to the market.
“It is reassuring to see that dividend growth remains robust across the portfolio, with the majority of holdings announcing increases of between 5 and 15 per cent,” he said.
“More importantly, the fact these opportunities are available at such attractive valuations is, we believe, a positive sign for the fund going forward.”
In an article later this week, FE Trustnet will look at some of the investment trusts that appear much cheaper in light of the recent volatility.
