Timing markets is notoriously difficult and is the main reason many fund managers prefer to leave the party early than get caught out by the swift change in market direction. 
While this is prudent, it does mean missing out on some of the gains at the tail end on a market cycle – a period that can be richly rewarding if done correctly.
With the market more towards the end of its market cycle than its beginning, Square Mile Investment Consulting & Research head of research Victoria Hasler (pictured) said now is the time to think about which side of the fence you want to be on.
The market has been on the up for much of the last decade (minus one or two incidents such as the taper tantrum and European debt crisis), as the below shows.
Performance of index over 10yrs
Source: FE Analytics
“At the moment one of the biggest things for us is thinking about this late-cycle timing and is this downturn sustained or will it come back,” Hasler said.
“I think that there is still a lot of money on the sidelines and I think we will get to a point where everyone will pile back in because there is good value.
“We will have the last death throes rally and then we will get a fairly sustained sell-off. That is my guessing, although it may be completely wrong.”
However, this “fairly sustained sell-off” has failed to emerge, despite a recent sharp correction, as investors continue to wait for signs that the environment is changing – either for the better or for the worse.
While she expects the market to rise again this year, Hasler said that a correction must eventually happen. “We have got to be near the end of the cycle surely?” she said.
If so, the investment director said there are three different options for investors. The first is to buy a fund that is going to be good during the late-cycle, knowing that it is not going to be held for very long.
Second, investors can buy a fund that is very defensive, thinking that we are probably due a reasonably sustained market correction at some point.
The third option is to be a long-term investor who will hold funds for 10-15 years and will therefore stick with the funds you own currently.
For those looking to be ultra-aggressive at the end of the bull market and reap most of the gains on offer, Hasler said there are some different options available.
“You want managers who don’t care about valuations (as much) as, typically, at the late-cycle stage everything rallies and the lowest quality stuff rallies the most,” she said.
“So you want to be buying really low-quality high yield bonds or probably things like small-cap equities might do quite well.”
She said there is also the potential for emerging market equities to perform strongly in this environment, although they have other drivers and are quite reliant on the prospects of the Chinese economy.
Below the Square Mile team suggests two funds that might be of interest to investors looking to take advantage of the late-market cycle.
For those investors looking to take advantage of a multi-cap approach, Daniel Pereira, investment research analyst at Square Mile, said Liontrust Special Situations fund is well suited to the mid-to-late cycle environment.
The five FE Crown-rated fund is run by FE Alpha Managers Anthony Cross and Julian Fosh and invests in UK large-, mid- and small-cap stocks using its proprietary ‘Economic Advantage’ process.
This focuses on companies with unrepeatable competitive advantages relative to their peers such as intellectual property, strong distribution channels or significant recurring business.
“The managers run this strategy using a flexible approach and can invest in companies across the market cap spectrum,” Pereira said.
The fund has been a top performer in the IA UK All Companies sector, up 269.83 per cent over the last decade, easily more than double the sector’s 98.93 per cent and FTSE All Share benchmark’s 96.09 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“Over recent years the fund has remained competitive compared to its FTSE All Share benchmark and the track record has been made all the more impressive given it has held in around 6-10 per cent cash,” Pereira said.
“If the market takes a prolonged turn for the worse, the cash allocation should not only provide relative downside protection, but it also may provide the opportunity for the managers to take advantage of share price weakness in some of their preferred companies.”
The £3.2bn fund is currently 41.8 per cent weighted to large-caps, 31.6 per cent in mid-caps and 18.7 per cent in smaller companies, with 6.5 per cent in cash.
It has a yield of 1.8 per cent and a clean ongoing charges figure (OCF) of 0.86 per cent.
The other interesting late-cycle fund, according to Square Mile head of quantitative research Tom Poulter, is Old Mutual North American Equity.
“The fund follows a systematic approach that uses rules and risk controls to make trading decisions in a methodical way,” he said.
“We would expect this fund to outperform its MSCI North America benchmark index during periods of rising stock prices and, unlike many more fundamental based strategies, it has the ability to avoid being left behind in late cycle market surges.
“As such, we believe this strategy to be one worthy of consideration as the cycle enters its more mature stages.”
The £2.7bn fund, run by Amadeo Alentorn, Ian Heslop and Mike Servent, has been a top quartile performer in the IA North America sector, returning 288.97 per cent over the last decade.
It is also one of the few funds to prove its ability to outperform the S&P 500 on a consistent basis, topping the index in seven of the last eight calendar years (and eight of the last 10).
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
However, Poulter said that this fund may underperform, like most quantitatively driven strategies, at market inflection points and so should truly be held over the long term.
Indeed, as the above chart shows, the fund struggled in 2008 when markets fell, losing more than the S&P 500 index.
Old Mutual North American Equity has an OCF of 0.985 per cent.