Japanese equities have entered bear market territory, the FTSE is losing ground, Europe is in the doldrums and even the mighty China is looking threadbare.
The turmoil has arisen largely – it seems – because investors around the world fear the US may begin to taper its QE programme.
I explained last week that I was struggling to see where performance would come from next, because in my view, the strong showing of the stock market in the last year has borne little if any relation to the performance of the economy.
The turmoil we’ve seen in the last week reinforces that view because nothing has really changed to provoke this ugly – though not yet total – collapse in share prices, except for rumours about the end of QE.
This is a sentiment-driven rally, and sentiment-driven share prices are as fickle as sentiment itself.
Tim Cockerill, head of collectives research at Rowan Dartington, agrees.
"We are in a bit of a hiatus," he said. "We are waiting for something to happen. Markets have performed more strongly than I’d anticipated they would, and it has seemed at times like any news is really good news."
"There have been some signs of recovery from the US, which have been welcomed, and at the same time everyone is fed up with caring about Europe – it’s almost like panic fatigue."
Investors’ desire for things to improve, and their willingness to ignore unresolved economic issues while they aren’t causing any problems on the surface, leaves them in a delicate position, he says.
"We’ve reached a point now where the market needs to see something which supports it at its current level, and maybe allows it to continue upwards," he said. "If that doesn’t happen and we don’t get any support, maybe investors say 'OK, we got overcooked'."
So, with everything hanging on the roll of a dice, what do we do with any gains we’ve realised while the going was good?
The answer, I am told, is to "get back to basics".
"Trying to ascertain what will happen next is virtually impossible," Cockerill said. "You just don’t know, and people who are looking at those timeframes are really looking at the expectation of price movement – they’re not really investing."
Focusing on your aims as a long-term investor helps you to ignore the noise, Cockerill believes, which would otherwise cloud your ability to pick the right fund.
"Businesses don’t think in the short-term – you can’t build a new factory based on what’s going to happen next year and you shouldn’t invest in a fund on that basis," he explained.
"You can be more certain about what to do when you think about the long-term: the US is going in the right direction, the UK will grind it out slowly, Europe will fix itself slowly. All of these things are true."
"Unless the underlying model for the whole financial system is broken, then things will get better, and on that basis you have time on your side. That means if you invest today and your investment drops 10 per cent next week, it should be of no consequence in 10 years’ time."
With that in mind, where should I be looking?
North America, the UK and Asia ex Japan offer the best potential for returns, according to your feedback on last week’s article, and I have already put forward Absolute Return as an option – because it fits with my preference for positive returns with limited volatility. I’m willing to put up with lower returns if I’m protected on the downside.
I am also interested in Europe, because I think the hammering it has taken in recent years leaves it in a strong position to outperform once its problems have been ironed out.
So, on to the funds.
North America – GAM North American Growth
I favour this fund because the manager, Gordon Grender, has a solid track record stretching back to 1985.
He is rated as an FE Alpha Manager and the fund itself has a five crown-rating. It has consistently beaten the S&P 500 index which is notoriously difficult to outperform, though it has on occasion underperformed the IMA North America sector by a significant margin.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Grender has a highly individualistic style, which means he can fall foul of the market if the mood is against him – as it was in 2009 when he underperformed the sector by around 12 percentage points – but the fund’s low beta and limited volatility is a testament to his disregard for the benchmark.
Cockerill thinks investors should be aware of the idiosyncratic nature of this manager.
"He’s been doing really well, but he’s not conventional," he explained. "His fund has a very low turnover, a mid cap bias, and it’s quite an eclectic mix and he often holds a lot of cash."
"You need to be aware that you’re not investing in a fund, you’re investing in Gordon Grender," he added.
Baillie Gifford North American is a fund Cockerill favours. "They’re buy-and-hold investors, which is unusual in this sphere," he said.
Europe – Baring Emerging Europe investment trust
Like everywhere else in recent months, Europe has seen vast inflows from investors who have suddenly decided they are willing to take a risk on their capital with a punt on equities.
The trouble is that the majority of this money has gone into Europe’s largest companies, leaving them with little room for further growth.
For this reason, I’d rather try my luck with emerging European equities as a play on the continent as a long-term recovery story.
Baring Emerging European investment trust is on a discount of 14 per cent to NAV (net asset value), and has a strong management team in the form of Martin Majdaniuk and Matthias Siller, both of whom have been in situ for some time, and are well resourced, with analysts across Europe.
Performance of trust vs index over 5yrs
Source: FE Analytics
The trust offers geared exposure to the continent, so it will rise faster than a mainstream European equities portfolio, and there is room for the current discount to narrow.
The discount has been as low as 7 per cent this year, and longer term it has traded at around 10 per cent.
Cockerill thinks emerging Europe is a good way to play the recovery in western Europe.
"My logic is that Europe may be a collection of economies and it may contain some very good companies, but like lots of global companies, they aren’t looking particularly cheap at the moment," he said.
"The logical question to ask is will Europe recover, and if it does, who stands to benefit? The answer is emerging Europe. If you are prepared to wait and be patient, it could work quite well for you, but you’d have to be prepared to wait."
Asia Pacific ex Japan – Aberdeen Asian Smaller Companies IT
I bought this trust initially because it has a great manager, a strong track record, and it invests in an area where I think there is a lot of potential for growth.
I sold it because a stop-loss kicked in to protect me on the downside – but the reasons I had for buying it haven’t changed. Perhaps I should buy into it again, now at a lower price, and get more for my money?
Cockerill thinks this is not necessarily a bad idea, but concedes that psychologically, putting your money back into an investment can be challenging.
"It’s tough, because you face the possibility of buying back into an investment you’ve made a profit from, and then watching it drop 10 percent," he said.
Psychology may muddy the waters, however, in the case of this trust. The fundamentals have not changed.
Performance of trust vs sector over 5yrs
Source: FE Analytics
"This is a trust where maybe it is worth getting back in at a lower price. Long-term, there are so many positive stories behind Asia, and smaller companies are even better. Add in a great manager and you’ve not got a bad combination."
The trust, managed by FE Alpha Manager Hugh Young and his Asian equities team, has five FE Crowns. It sits on a small discount of 2.64 per cent, having slipped recently from an average premium hovering around 3 per cent.
Cockerill also rates the Pacific Assets Trust, managed by the highly regarded team at First State, and their open-ended fund, First State Asia Pacific Leaders.
"The team behind these vehicles are long-term investors, buying quality. If you buy quality, ultimately you won’t be disappointed," he added.
Capital protection: Standard Life Global Absolute Return Strategies or the Lindsell Train Investment Trust?
The Standard Life GARS fund appeals to me because it offers the potential for upside in all market conditions, with limited downside risk thanks to the weird and wonderful long/short strategy employed by the team behind it.
The fund has four FE Crowns, and historical performance is incredible – positive and steady since 2009. However, the fact that I do not understand the way it makes money makes me wary.
I could explain how long/short investing works, I am sure, given half an hour and a reference book, but this wouldn’t stop me feeling that sense of unease with putting my own money into such a sophisticated mechanism.
With a similar philosophy to Troy, Odey and Ruffer, Nick Train’s Lindsell Train investment trust appeals to me far more.
It is a pure equity portfolio and so is very different to something like Standard Life GARS, but it puts an emphasis on avoiding losses.
The trust contains much of the manager’s personal wealth and – rather than using a complex derivative strategy to protect capital – relies on shifting to cash to defend itself when times are tough.
Performance of fund, trust and sectors since June 2008
Source: FE Analytics
The trust – which has five FE Crowns – is on a massive premium though, of 16.32 per cent, according to FE Analytics. It also charges a performance fee and has a pretty high OCF.
Cockerill thinks the premium is too big to swallow.
"I couldn’t bring myself to buy into a premium that big," he said. "We use Insight Absolute Equity Market Neutral, which has a lower volatility than [my alternative suggestion] Insight Absolute Insight."
Investors should be aware of the implications of an absolute return fund, he adds.
"It’s very easy to feel smug in an absolute return fund if the market falls off and you look at your relative performance, but for a lot of investors, the problem arises when the market starts to go up and their investment lags behind."
Next week I’ll be making a decision about which fund to invest in, and explaining why I’ve chosen that particular investment in greater detail. In the meantime, I’d like to know which of these routes you think offers the best potential for returns.
Click here to let me know where you would put your next investment.
