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Who should you turn to in turbulent times?

Who should you turn to in turbulent times?

The past few months have been a turbulent time for the markets. The Chinese stock market bubble has burst, reinforcing fears about the health of China’s economic model and what that might mean for global growth. More recently, the decision by the US Federal Reserve to hold back on raising interest rates in September as it had previously guided, has fuelled global pessimism over the prospects for global growth and fragility of the financial system.

So where should investors turn in rocky times for equity markets? Options for cautious investors might range from fixed income, targeted absolute return funds, multi-asset funds and convertible bonds. But it is also the case that some equity fund managers have more defensive investment styles than others.

At Tilney Bestinvest, we have just produced research highlighting the equity fund managers who have demonstrated a high incidence of protecting their portfolios in months when the markets have fallen across their careers. The research looked at the track records of 353 fund managers or teams with tenure in a sector of at least five years in a particular sector*. View the funds research highlights here.

So, what were the findings?

Active equity fund managers have a much higher relative success rate in down months than up months. We found that on average 79% of active fund managers had outperformed their respective index most of the time during months when the markets fell while on average only one third of them outperformed most of the time in months when the markets they operate in rose. This is of course in part down to the fact that few managers are fully-invested at any given time as cash is coming in and out of the fund, so this liquidity provides a buffer in tough times and a drag factor in a strongly rising market.

Yet it is also the case that managers will proactively, as opposed to inadvertently, use cash positions in tough times, and can take defensive positions. For example, in recent times many active UK equity managers have been avoiding commodity stocks and companies with high exposure to China and emerging markets, which we believe is one of the major factors that has resulted in the vast majority of active UK equity funds outpacing the returns of index trackers over one, three and five years. The latter have been fully exposed to under pressure mining and oil and gas stocks.

Who are the most defensive managers?

A notable example of a manager prepared to tactically allocate to cash is JO Hambro Capital Management’s John Wood who we calculate has beaten the market 77% of the time during down months over an identifiable career spanning more than 13-years running funds in the UK All Companies sector at Newton and latterly JO Hambro. Wood has been warning for some time about the risk of a “financial tsunami” and accordingly positioning his fund very defensively. At the end of August the fund was weighted 17.6% in cash.

A different approach has worked successfully for duo Anthony Cross and Julian Fosh who co-manage the Liontrust Special Situations, UK Growth and UK Smaller Companies funds. The team feature in our research as having successful defensive track records in down markets in both the UK All Companies and UK Smaller Companies sectors. Their investment philosophy, which they called the Economic Advantage process, is to focus on companies that have a durable economic advantage that provides resilient performance throughout the ups and downs of the economic cycle. This might include ownership of intellectual property, such as patents, strong distribution channels that are difficult for competitors to replicate and a high degree of recurring earnings versus transactional activity. The approach has clearly been successful with very consistent outperformance and a strong record for capital preservation in tough markets, but investors should remember that past performance is not an indicator of future returns.

With markets having sold off aggressively in recent months, investors face the conundrum of deciding whether to add to their portfolios while markets are weak while also being mindful about the potential for further volatility in the near term. Investing with managers with strong defensive qualities might prove a sensible way to access the markets.

* For the purposes of analysing manager career records and evaluating the success of investment decisions we have stripped out the impact of fund costs. Where a manager has run more than one fund with the same sector at the same time, we have blended the track record.

Tables of most defensive equity fund managers

UK All Companies

Manager(s)

Current funds managed in Sector

% down months out performed

Anthony Cross / Julian Fosh

Liontrust Special Situations, Liontrust UK Grth

85

Luke Kerr

Old Mutual UK Dynamic Equity

80

Stephen Bailey / Jan Luthman

Liontrust Macro UK Growth

77

Jamie Seaton

GVQ UK Focus

77

John Wood

JO Hambro UK Opportunities

76

Andrew Jackson

EdenTree UK Equity Growth

75

Chris Hutchinson

Unicorn Outstanding British Companies

74

Mark Barnett

Inv Perpetual Inc, High Income, UK Strategic Income

73

Patrick Barton

IWI Oriel UK

72

Catherine Stanley

F&C Responsible UK Equity Growth

72

UK Equity Income

Manager(s)

Current funds managed in Sector

% down months out performed

Catherine Stanley

F&C Responsible UK Equity Income

84

Michael Clark

Fidelity MoneyBuilder Dividend

84

Francis Brooke

Trojan Income

81

Jamie Forbes-Wilson

AXA Framlington Blue Chip Equity Income

78

Richard Hughes

M&G Charifund

77

Hugh Yarrow

Evenlode Income

76

Chris Murphy

Aviva Inv UK Equity Income, RBS Equity Income

75

Colin Morton

Franklin UK Equity Income

75

Thomas Moore

Standard Life UK Equity Inc Unconstrained

74

Carl Stick

Rathbone Income

73

UK Smaller Companies

Manager(s)

Current funds managed in Sector

% down months out performed

Mark Niznik

Artemis UK Smaller Companies

88

Richard Power

Octopus UK Micro Cap Growth

83

Anthony Cross / Julian Fosh

Liontrust UK Smaller Companies

82

Victoria Stewart

Royal London UK Smaller Companies

80

A Brough / Rosemary Banyard

Schroder UK Smaller Companies

76

Europe Excluding UK

Manager(s)

Current funds managed in Sector

% down months out performed

John Bennett

Henderson European Focus, Henderson European Selected Opportunities

82

Dave Dudding

Threadneedle European Select

78

Alexander Darwall

Jupiter European

77

Will James

Standard Life European Equity Income

77

Vincent Devlin

BlackRock Continental European

76

Asia Pacific Excluding Japan

Manager(s)

Current funds managed in Sector

% down months out performed

Richard Sennitt

Schroder Asian Income, Schroder Asian Income Maximiser

83

David Gait

First State Asia Pacific Sustainability

81

Paul Hilsley

L&G Asian Income

73

Angus Tulloch

First State Asia Pacific, First State Asia Pacific Leaders

71

Mike Kerley

Henderson Asian Dividend Income

70

Japan

Manager(s)

Current funds managed in Sector

% down months out performed

Morant Wright Team

CF Morant Wright Japan, CF Morant Wright Nippon Yield

67

Andrew Rose

Schroder Tokyo

63

Chisako Hardie

AXA Framlington Japan

63

Kazuyuki Terao

Allianz Japan

62

Stephen Harker

GLG Japan Core Alpha

61

North America

Manager(s)

Current funds managed in Sector

% down months out performed

Clearbridge Investment Team

Legg Mason IF Clearbridge US Equity

76

Clare Hart

JP Morgan US Equity Income

71

T. Forsha / Henry Sanders III

Aviva US Equity Income and v II

71

Jenny Jones

Schroder US Mid Cap

68

Gordon Grender

GAM North American Growth

63

The value of your investment can go down as well as up, and you can get back less than you originally invested.

The Bestinvest Online Investment Service, including any account analysis and investment reports provided by our guidance services, is an online execution-only dealing service for investors who want to make their own investment decisions. It does not provide advice on the suitability of products and investments; if you are unsure about the suitability of any investment you should seek professional advice. Clients of our Investment Advisory Service and Managed Portfolio Service can use the website to obtain current valuations of their investments but cannot trade on these accounts online and should call their adviser if they wish to discuss changes to their investments.

Past performance or any yields quoted should not be considered reliable indicators of future returns. Restricted advice can be provided as part of other services offered by Bestinvest, upon request and on a fee basis. Before investing in funds please check the specific risk factors on the key features document or refer to our risk warning notice as some funds can be high risk or complex; they may also have risks relating to the geographical area, industry sector and/or underlying assets in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

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