At the root of the most recent falls – the Nikkei dropped 7.5% on 12 June as part of a bigger 15% correction over the week; the FTSE hit a five-month low yesterday, the same day European and Asian indices fell by 2.5% – are various comments from Ben Bernanke about tapering QE.
Volatility good…
To counter such volatility, the mainstream equity and bond strategies most commonly turned to include funds such as Threadneedle European Select, First State Global Emerging Market Leaders, Liontrust Special Situations and Fidelity MoneyBuilder Dividend – all picks of Bestinvest managing director Jason Hollands.
But, as traditional asset classes continue to correlate to one another, where should defensive investors be looking?
For Towry’s head of investment Andrew Wilson the answer lies in areas such as volatility, as well as macro and managed futures that could be crucial to generating outperformance in the coming months.
“Stock markets have doubled over the past four years,” he says, “but are unlikely to do the same over the next four, while fixed interest yields are on a rising trend.”
He says the time has come to make money out of the trends and volatility within markets as well as capturing the movement in currencies.
Favoured funds include Indus PacificChoice Asia, Majedie Tortoise, Schroder GAIA Egerton Equity and Morgan Stanley Diversified Alpha Plus.
…risk aversion bad
James Calder, head of research at City Asset Management, owns various alternative funds but stresses these are an ongoing part of diversified client portfolios rather than a reaction to short-term market fears, funds such as Troy Trojan and Ruffer Total Return. Troy Trojan has 30% in index-linked debt, 25% across cash and Treasury Bills, 15% in gold (10% direct and 5% in shares) and the balance of 30% in equities.
“Within equities, there are managers that give us genuine alpha but also tend to lose less in down markets, such as Schroder Asia Total Return,” Calder adds.
Investors being cautious does not, in today’s market environment, remove risk – it may not even reduce it – as there is inherent risk in volatility and, depending on the strategy chosen, illiquidity.
Even in traditional multi-asset investing, investors today are urged to look at equity funds where the managers focus on undervalued companies.
There is also the risk of investors being too risk averse…but that’s a topic for another day.
Let us know where you invest for more defensive clients in the comments box below…
