Volatility creates opportunities

Sam Slator 27/10/22 in Strategy

Volatility may cause investors to have sleepless nights, but it also provides plenty of opportunities for experienced fund managers to make money.

Rising inflation, recession fears, the lingering effects of Covid-19, and the ongoing war in Ukraine have spooked global stock markets this year.

Major indices such as the FTSE 100 and S&P 500 are significantly below where they were at the start of January after an extraordinarily turbulent 2022.

But what does this mean for investors? How can they take advantage of this situation and where are fund managers focusing their attention?

Not many attractive options

According to Remi Olu-Pitan, head of multi-asset growth and income at Schroders, 2022 has been a conundrum for most investors. “Neither credit nor equities have been attractive options this year,” she said. “For a multi-asset investor, cash has been the place to be and patience the key attribute to have.”

While she believes we’ve already had the macro phase one of a market re-set, which was all about moving into cash, the focus is now on stage two. “It will be about identifying those companies who can deliver earnings and avoid default,” she said. “It will also potentially offer a good entry point into commodities for those without exposure already.”

Using volatility to your advantage

Vincent Ropers and Philip Matthews, who run the TB Wise Multi-Asset Growth fund, have been using the current situation to their advantage.

“We had built up our cash reserves over the summer and we used the volatility in September to put some of that cash to work,” they said. However, the pair haven’t suddenly become gung-ho overnight – they remain cautious, adding to a strategic bond fund as, “an attractive way to lock-in very attractive yields” in bond assets, with relatively low duration and low risk of default. The pair also took some profits from a utilities and infrastructure trust after a continued strong absolute and relative run.

Vincent told us more about recent activity in the fund in this video interview.

High inflation caused problems

The five-strong investment team behind the VT Momentum Diversified Income fund have pointed the blame for September’s stock market falls at high inflation. They said the persistence of such high rates across much of the developed world was enough to trigger “increasingly hawkish policy moves” by central banks.

“During the heightened volatility in the last week of the month, we took advantage of the increasingly attractive yields on offer across the corporate debt markets,” they said.

The fund also looked to benefit from Capita agreeing the sale of Pay360 for £150m, in a move which will further strengthen its balance sheet. “We took the opportunity to increase our allocation to Capita on the back of the good news,” noted the team.

Difficult period for financial markets

The multi-manager team behind the CT MM Navigator Distribution fund also remain cautious with positioning. “We are underweight both equities and bonds,” the team said. “However, with yields on the rise, for the first time in a very long time, bonds are looking much more interesting.

The team argue that the era of ‘TINA’ (There Is No Alternative) in reference to equities being the only game in town, is coming to an end. “This new interest-rate environment brings threats and opportunities,” the team added. “We have been trimming back some of our alternatives exposure, not least through some of the listed property companies. This has proven timely given recent price moves lower.”

Diversification is key

The Columbia Threadneedle multi-manager team also noted how diversification and cautious portfolio positioning were both helping fund performance in these volatile times.

“Timing such volatile markets is tough,” the team said. “Sometimes doing nothing is the right move, but we are keeping in close touch with our fund managers for opportunities, given that volatility often leads to mispriced assets.”

Therefore, while the team remains optimistic about finding opportunities, the managers also acknowledge the potential difficulties that can arise. “While the short-term outlook appears tough, history shows that the other side of bear markets delivers extremely strong returns,” they added. “Nonetheless, the short-term outlook remains challenging.”

Getting bogged down

A recent update from the Jupiter Merlin team, which has six multi-manager funds for varying risk appetites – three of which are Elite Rated by FundCalibre – highlighted the challenging economic backdrop and where it was focusing its attention.

“It is easy to get bogged down in the cost-of-living-crisis, domestic car-crash politics and the Tories deciding whether self-evisceration or immolation is the fastest way to political oblivion,” it wrote.

The team argued that the current investment environment was partly driven by a combination of unorthodox economic theory.

It also noted how “shifting geopolitical tectonic plates” have resulted in a major conflict in Europe, with everything being compounded by a pandemic.

Careful fund manager selection

The Jupiter team noted that its Merlin range of funds were long-term investments. “They are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each,” it stated.

“We seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions,” it added.

You can research all Elite Rated multi-asset funds here.

Photo by Volodymyr Hryshchenko on Unsplash

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