Sam Grant-Dalton, investment manager at Close Bothers Asset Management discusses weathering the volatility storm and why active investing is important.
It’s been a turbulent time for global markets, but the bottom line is that we are still relatively constructive on the outlook for equities, particularly when considering returns from other asset classes. This is reflected in our asset allocation, which is slightly overweight equities but well diversified across geographies and investment styles to help smooth what we expect will be a period characterised by further bouts of volatility.
Corrections of up to 10% are normal in markets, and in the later stages of an expansion volatility can be even greater as markets react to changing economic conditions. This points to the need for active asset allocation and manager selection as market gyrations provide the opportunity for active high conviction managers to significantly add value.
Playing it safe
In a rising inflation and interest rate environment, government bonds may no longer be the safe haven they once were, and we have been focussed for some time on areas such as short-dated high quality corporate bonds. They combine relatively attractive yields without significant price or maturity risk, along with the flexibility to reinvest coupons at potentially higher levels.
We have also been adding to alternative investments this year, such as absolute return strategies, which can act as a ballast in more volatile periods and make money regardless of equity market direction.
We have been underweight UK equities, as headwinds around Brexit uncertainty continue to delay crucial investment from businesses and participation in the UK market from international investors. However, valuations have become more attractive, and if the dust settles there could be an interesting opportunity.
Call to action
Throughout 2018, we have continued to see strong relative performance from our active managers. For instance, in the UK, year-to-date, the Threadneedle UK Equity Alpha Income, Liontrust Special Situations and the Schroder Income funds have all outperformed their respective benchmarks by approximately 7%.
In the US, we have combined different styles, such as the growth-oriented Baillie Gifford American fund with the more value-focused Brown US Flexible Equity fund, both of which have outperformed their benchmarks this year.
Elsewhere, it has been a particularly tough environment for Asia and emerging markets, and downside protection drives our fund selection process in these volatile markets. For instance, the Sloane Robinson Emerging Markets fund, managed by Ed Butchart, can use significant cash balances and hedging to reduce risk and keep some dry powder. Furthermore, his high conviction approach allows him to pick 30 or so winners out of the many average businesses in emerging markets.
In Asia, we invest in the Schroder Asian Total Return fund for growth-oriented clients and the Schroder Asian Income Maximiser fund for income clients, both of which tap into the same large and experienced team and have produced long-term track records of outperformance and downside protection.