In a recently-published investor note, SIG uses the example of the FTSE 100’s performance in the first five months of 2011, which showed a largely narrow trading range of 5,800 and 6,100; the FTSE 100 also started the year at 5,899 and finished at 5,999 at the end of May, a difference of just 1.7%.
In a world of bulls and bears, SIG has christened this a ‘hippo’ market – one that is wallowing and going nowhere.
Volatility
This narrow range, however, still found volatility fairly easy to come by given the dramatic market fall in March and the aftermath of the Japanese natural disasters which is why Ryan Hughes, head of multi-manager at SIG, suggests the answer to how to invest in a sideways market lies in this volatility.
“With volatility comes opportunity,” he says. “Even if markets spend short periods of time not rising or falling, there will always be plenty of stock-specific movement. Looking again at the FTSE 100 Index, during the first five months of this year there was significant dispersion between the best and worst stocks with ARM Holdings rocketing 35.2% while Essar Energy plummeted by 21.4%.
"Clearly, if this is broadened out to the FTSE All Share Index then this dispersion becomes significantly wider.”
Hughes sees this dispersion creating opportunities for fund managers to add value adding that benchmark hugging in the majority of instances is “a recipe for long-term under-performance”.
Opportunity
He quotes John Templeton, of Templeton mutual funds fame, who said: “If you want to have better performance than the crowd, you must do things differently from the crowd.”
These opportunities, Hughes argues, are not limited to when markets are flat or moving sideways which is why he prefers to pick those managers who have the conviction to find and invest in more lively directional stocks.
“With this in mind,” he concludes, “I firmly believe in investing with managers who are happy to go out into the jungle and take active risk…It is this instinct for stock picking in all scenarios that I want my managers to exhibit regardless of market conditions.”
