As markets ricochet amongst a cocktail of concerns, “keep calm and carry on investing,” says TBI’s Hollands10 February 2016
As markets ricochet amongst a cocktail of concerns, “keep calm and carry on investing,” says TBI’s Hollands
As we move into the last couple of months of the tax year and the 5 April deadline looms ever closer, many investors may be staring at the unremittingly bearish headlines about the state of financial markets and perhaps wondering whether to skip making new ISA investments altogether this tax year.
Here, Tilney Bestinvest’s Managing Director Jason Hollands, encourages long-term investors to ‘keep calm and carry on’ through the white noise of current concerns, and highlights areas and funds which investors might focus on during this volatile period:
Hollands comments: “There’s a lot of anxiety unfurling in the markets at the moment, with fears ricocheting between several concerns which combine into a towering wall of worry, these being:
- The slowdown in China’s growth rate and the fragility of its financial system, with the risk that a sharp devaluation of the Yuan could export a deflationary tsunami around the globe.
- The rout in oil, gas and industrial commodity prices, which while being beneficial for some economies also weighs on the UK’s FTSE 100 and is raising the prospect of defaults in US high yield bonds.
- Concerns about the solvency of European banks.
- Uncertainty around the UK’s forthcoming “Brexit” referendum.
“It wasn’t that long ago when we were concerned that markets had grown too complacent about risk, in the belief that central banks would always step in to the rescue. What has been a game-changer in recent months has been a growing sense that central banks are no longer in control of the situation, so very rapidly bearishness has moved into ascendancy.
“While we went into 2016 with a cautious outlook, and believe the current volatility could continue for some time, we also believe that recent declines make for a far more attractive entry point for long-term investors. No one knows how long this current turmoil will continue but history suggests that markets tend to overshoot on both the way up and the way down. We may be reaching a point of capitulation where the exodus out of equities is herd-like rather than driven by fundamental factors.
“For truly long term investors, it is important not to get blown off course by the short term white noise of weekly market moves but instead to focus on building a robust, well diversified portfolio that will stand the test of time. For those concerned about the sharp swings in markets, a sensible strategy is to drip feed their cash in over a period of weeks or months.”
Hollands outlines a number of areas that investors might consider this ISA season:
1. Put Absolute Return funds on the agenda
In volatile markets, absolute return funds should be high up investor’s radars to both help reduce overall portfolio volatility and enable them to back managers who can utilise a wider set of tools to deliver returns. However, some of these tools can be complex.
For investors looking for a strategy aimed at generating positive returns that are not dependent on general market movements, we favour multi-strategy targeted absolute return funds – though a positive return is not guaranteed. Here, one of the funds that we rate highly is the Invesco Perpetual Global Targeted Returns. The fund is an umbrella for a plethora of underlying strategies that invest across equities, bond markets, currencies and interest rates and as such provides a diversified “one stop shop” approach to absolute return investing.
A second idea in the absolute return space, but which is less focused on reducing volatility per se but instead uses both long and short positions in UK and European companies to access a wider range of money making opportunities, is the FP Argonaut Absolute Return fund. The team focuses on companies which they believe have the capacity to deliver earnings surprises compared to the consensus view, whether in a positive or negative way. The ability to “short sell” companies means the fund manager seeks to generate returns from companies that they believe will disappoint, as well as those that will do well. For example, the fund has a short position in Standard Chartered, a bank with a high exposure to Asia and Emerging Markets, regions which are facing negative headwinds. The team at Argonaut see the potential for disappointing loan growth and an increase in bad loan provisions because of the deteriorating conditions in Asia.
2. For equity investment consider Europe
While we think the year could remain a volatile one for equities, Europe is our preferred equity market at the moment as the policy environment remains very supportive for shares. The European Central Bank has adopted negative interest rates and is already engaged in a QE stimulus programme which it may well accelerate. Furthermore, low energy prices are also a positive for Western Europe, as a net importer of oil and gas. The Threadneedle European Select fund has long been one of our top picks and has quite a defensive style, with a focus on high quality businesses.
3. In uncertain times back big brands
With the global growth outlook weakening, there’s a strong case for focusing on high quality brands, as these business typically command loyalty that can prove resilient through the economic cycle and which provides a high barrier to competition. One fund that has exposure to such companies is the FundSmith Equity fund, managed by Terry Smith, one of the most colourful and pugnacious characters in the City. His approach is very much a long-term buy-and-hold one, backing a concentrated portfolio of growth companies which have the ability to sustain high rates of return on capital employed. The fund is split between the US, the UK and Europe and offers investors exposure to giant consumer brands like Dr. Pepper Snapple, Pepsico, Imperial Tobacco and Microsoft.
4. Play a defensive game in the UK
Many British investors naturally gravitate to UK funds, but the road ahead could be rocky, with the upcoming Brexit vote generating uncertainty. This is most likely to be felt in Sterling, which has already weakened in recent times, and in Foreign Direct Investment, but don’t forget that the UK equity market is very international in nature and not particularly reflective of the domestic economy at all.
Ironically a weaker Pound could help massage UK-listed company dividend pay-outs for sterling investors, as many UK-listed firms earn most of their revenues outside of the UK. As as overseas earnings are translated back into Sterling dividends, this could help mask weaker underlying dividend growth. However, it is vital to be selective and avoid potential dividend landmines, as dividend cover has weakened in a number of sectors, so it is vital to avoid stocks which could face cuts. One fund that pursues a very selective approach is the Standard Life UK Equity Income Unconstrained fund.
For growth investors, a strong defensive choice is the JO Hambro CM UK Opportunities fund, managed by John Wood. The fund is a concentrated portfolio of 25 very high quality large and mid-cap companies, with predictable and growing cash flow streams. Wood has a strong emphasis on protecting capital and is prepared to hold a considerable proportion of the fund in cash, when he feels cautious on markets and valuations. He entered 2016 with 18.8% of the fund in cash and is in a great position to snap up companies that meet his strict quality criteria which have been indiscriminately marked down by falling markets.
5. Could Asia / EM be the “wild card”?
We’ve been particularly cautious on Asia and Emerging Markets for a long time now, as they have faced significant headwinds both from the slowdown in China but also as the Dollar strengthened in expectations of a US rate hiking cycle which has made the costs of servicing Dollar denominated debt, very painful. Yet we may now be nearing a point where so much negativity is priced in, that these markets could be the “wild card” for 2016, for bargain hunters. While these markets have looked “cheap” for some time, we think that market expectations of a normal US rate hiking cycle are rapidly evaporating and there is even a chance of further easing. A weakening Dollar will provide a relief to these markets but set against this is the risk of a further deterioration in China and a deeper devaluation of its currency. Investors tempted to make a contrarian call on Asia, might therefore consider a fund such as Stewart Investors Asia Pacific Leaders, which has very little exposure to mainland China (1.3%) and instead has put its chips on the India table (23%).
The above are some fund ideas based around various themes and should not be considered as advice to invest. Other investments that we highly rate within each sector can be found at: www.bestinvest.co.uk/premier-selection.
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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Current or past yield figures provided should not be considered a reliable indicator of future performance.
This article is not advice to invest or to use our services.
Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing. We aim to provide investors with information to help them make their own investment decisions although this should not be construed as advice or an investment recommendation. If you are unsure about the suitability of an investment or if you need advice on your specific requirements, we strongly suggest that you consider professional financial advice.
Underlying investments in emerging markets are generally less well regulated than the UK. There is an increased chance of political and economic instability with less reliable custody, dealing and settlement arrangements. The markets can be less liquid. If a fund investing in markets is affected by currency exchange rates, the investment could both increase or decrease. These investments therefore carry more risk.
Targeted Absolute Return funds do not guarantee a positive return and you could get back less than you invested, as with any other investment. Additionally, the underlying assets of these funds generally use complex hedging techniques through the use of derivative products, which can carry additional risks which may not be immediately apparent.
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About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
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Headquartered in Mayfair, London, Tilney Bestinvest employs over 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.
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For further information, please visit: www.tilneybestinvest.co.uk
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.