Baking up an investment portfolio
I’ve always fancied myself as quite the baker and, if you follow FundCalibre on twitter, you’ve no...
Years ending in ‘7’ have not been lucky ones in financial markets, points out AXA’s head of fixed income Chris Iggo. We had the stock market crash of October 1987, the Asian financial crisis in 1997 and the beginnings of the global financial crisis in 2007 with the run on Northern Rock. So how is the end of 2017 shaping up?
We asked FundCalibre investors last month for their views and opinions were mixed. Positivity led the way, with 36% of respondents indicating they felt good about stock markets today. At the other end of the spectrum, just 15% said they felt negative. But there were a lot of people sitting on the fence!
30% said they felt neither strongly good nor bad about prospects, but were more neutral. 19% were undecided.
So what can we glean from this and how can you prepare your portfolios?
US and UK markets remain around all-time highs, suggesting FundCalibre investors’ views reflect a prevailing positive sentiment, despite global tensions surrounding North Korea and terrorist risk. Both Japanese and South Korean stock markets fell after Kim Jong-un launched missiles over northern Japan on Tuesday.
On a separate note, the US debt ceiling issue has also come around again and, as in 2015, US political dynamics are causing concern that Congress may not reach a deal to raise the ceiling in time. Failure to raise the debt ceiling could, in theory, lead to the US defaulting on treasury bond payments. In reality, this is unlikely, but it may not hurt to have a contingency plan in place. At the very least, markets could experience heightened volatility in the lead up to the October deadline.
At the risk of sounding like a broken record, the other concern as we near the end of this year is valuations. My colleague Juliet wrote last week about potential impacts for investors of buying expensive bonds and I’ve commented several times myself about the same in equity markets, particularly the US market.
I’ve also mentioned before that Europe is a market where I see better value at the moment, but I should emphasise this is relative. European companies in fact don’t look wildly cheap compared to their historic valuations; they are merely less expensive than US or UK counterparts. Added to this the improving economic fundamentals and increased profit forecasts for the continent, and it is somewhere I have recommended a few times recently.
On balance though, I believe the end of 2017 is a time to be prudent. Taking steps to ensure you have some protection in your portfolio could turn out to be a wise decision. Several of our Elite Rated absolute return funds are designed specifically for this purpose.
Take a look at Brooks Macdonald Defensive Capital for a fund that invests across a wide variety of slightly unusual assets (convertible bonds, preference shares, structured notes etc) with the aim of delivering positive total returns in a range of market conditions. A quick look at its performance charts shows it has comfortably met its goal in the past few years and the fact it has been capably run by the same manager since launch should help to provide stability if we do see ups and downs in the coming months.
If you want to invest in equities, Jupiter Absolute Return makes use of some interesting shorting strategies. Manager James Clunie is both an academic (with a PhD in short selling) and an experienced manager who has created a fund that stands out for its low correlation with other asset classes – a highly useful and increasingly rare diversifying characteristic.