Equity markets have been going through a turbulent time of late as pessimism gathers pace. The cocktail of concerns include fears around the pace of China’s economic slowdown and its ramifications for global growth, the prospect of monetary tightening by the US Federal Reserve (FED), the debt mountain that has built up in emerging markets and deflationary pressures ricocheting around the globe.
With the latest downward lurch in markets, led by tanking commodity stocks, investors in funds which are correlated to general market movements may well be looking for investments that are built for tougher times. With this is mind Jason Hollands, Managing Director of leading private client investment firm Tilney Bestinvest, looks at five investment vehicles that could help investors navigate stormy markets. Although these have separate risks attached to them, such as Absolute Return funds which use complex hedging techniques to achieve positive returns.
Hollands’s five ideas are:
1. Invesco Perpetual Global Targeted Returns
“The Invesco Perpetual Global Targeted Returns (“GTR”) fund aims to achieve a positive return in all market conditions over a three-year rolling period, targeting a gross return of 5% above UK interest rates (3-month LIBOR) and with half the volatility of global stock market, although this is not guaranteed. It seeks to do this by investing in a plethora of distinct investment ideas – currently 26 – each of which aims to add a little return, often. These cover trades in equity markets, credit markets, relative movements between currencies, the direction of interest rates and volatility.
“The fund is very clearly an upstart competitor to the now massive and successful Standard Life Investment Global Absolute Return Strategies (“GARS”) fund, which we also rate highly. At £2.9 billion in size “GTR” is a relative David in sized compared to Standard Life’s £26.3 bn Goliath and is very scaleable. While a number of challengers have emerged to replicate the success of “GARS”, Invesco Perpetual’s is particularly well placed being managed by some of the former Standard Life team,” said Hollands.
2. Threadneedle UK Absolute Alpha
Hollands’s next pick is the Threadneedle UK Absolute Alpha funds which he says “Offers investors participation in the UK stock market but with far less volatility than a traditional fund. It invests in UK large and mid-sized companies, but also takes “short” positions in companies the managers believe are set to disappoint. This “long / short” strategy enables the managers, Mark Westwood and Chris Kinder, to generate returns from both companies they think are undervalued and will benefit from an eventual re-appraisal by the market and those they believe are expensive and are vulnerable to a de-rating. Typically the fund has around two-thirds in “long” positions and a third in “shorts”. For example, earlier in the year the fund profited from shorting two of the large supermarket chains which suffered from increased competition from discounters Aldi and Lidl (positions now closed). While the FTSE All Share has declined by 6% in the 12-months to end of August, this fund made a positive return of 6%."
3. FP Argonaut Absolute Return
A second long/short fund picked out by Tilney Bestinvest is the FP Argonaut Absolute Return fund. Hollands explains: “This a “long/short” equity fund invested principally across European and UK equity markets. It has been more volatile than the Threadneedle UK Absolute Alpha fund, but with attractive returns and lower volatility than the FTSE Europe Index. The fund is managed by Argonaut Capital Partners, a European equities focused boutique founded by ex-Neptune manager Barry Norris in 2005. Currently the fund has 35 long positions and 21 shorts, with its main negative positions being in the financial and energy sectors.
4. JO Hambro UK Opportunities
Hollands added: “Of course defensive approaches aren’t the exclusive reserve of funds that use sophisticated hedge-fund like investment techniques or esoteric trading strategies that investors may struggle to get their heads around. Some equity managers have investment styles that are inherently defensive, one being JO Capital Management’s Hambro’s John Wood who has been particularly successful in tougher times. We estimate that across his 13-year track record of managing funds in the UK All Companies sector he has beaten the market in 77% of down months.
“Mr. Wood has managed the JO Hambro CM UK Opportunities fund since launch in 2008 and runs a tight ship, with the fund currently invested in 27 quality growth companies that generate predictable and growing cash flows and have strong balance sheets. Stocks are selected on their individual attributes, not based on how large a constituent they are in the FSTE All Share Index. While that might not sound dissimilar to the claims of some other genuine active managers, Wood has both a strict sell-discipline and a strong focus on capital preservation although again this is not a gurantee, with the manager proudly adopting Warren Buffett’s mantra: “Rule No. 1: Never Lose Money. Rule No 2: Never Forget rule No: 1” at the top of his commentaries.
“For some time Wood has warned of a coming “financial tsunami” as markets have been artificially inflated by extreme monetary policies and Quantitative Easing. He has been holding back significant cash in the fund (17.6% at the end of August) to protect capital and be in a position to invest when better value emerges.
“Although the fund is now “soft closed” to deter new direct investors to prevent it becoming too large, it remains available, on certain platforms including ours,” he added.
5. Personal Assets Trust
Hollands’s final pick is an investment trust: “Personal Assets Trust is advised by Troy Asset Management and pursues a strategy which places a very strong emphasis on capital perseveration rather than measuring its success based on relative performance against markets. Although it sits alongside peers that focus on global equities, Personal Assets invests across equities, index-linked bonds, gold and cash. The valuation of assets is especially important for Personal Assets Trust and if the management believe markets are overpriced, the trust will hold cash instead rather than overpay.
“This highly defensive approach has been deeply out of favour for the last few years as markets surged higher puffed on by the tail winds of central bank stimulus policies but ‘when the balloon goes up’ as we may well be seeing at the moment, this is an investment approach that should prove robust. The defensive nature of the portfolio is evident with a 27.5% exposure to cash and near-cash investments such as short-dated government bonds.”
Hollands concluded: “It is impossible to predict with accuracy how long this current spell of heightened volatility will continue but for some time siren voices have been warning that markets were being too complacent around risk.
“Markets have enjoyed unprecedented support for several years now in the form of abnormally low interest rates and the provision of a huge amount of liquidity from central banks such as the Fed, Bank of England, Bank of Japan and most recently the European Central Bank.
“With some of these authorities now looking to “normalise” policy at a time when concerns have been mounting over China, markets may well remain skittish, reacting to each new piece of data, leading to big swings. This environment requires long-term investors to keep their nerve and ensure their ISA and pension portfolios are well diversified. More defensive investments may have the potential to help bring greater stability to an overall portfolio.”