Red October: stock markets fall but opportunities rise

As we all know, the value of our investments can go down as well as up – and October was a sharp reminder of this. Of the 37 different fund sectors listed, only eight managed to stay in positive territory*.

The asset class that held up best over the month - as markets grappled with rising interest rates in the US, trade war tensions and more political uncertainty – was UK index-linked gilts. The sector, which is made up of UK government bonds linked to inflation, was up 3.39%*, with plain old UK gilts in second place up 1.21%*.

The worst hit areas were China and global smaller companies. The IA China/Greater China sector was hit hardest, down 10.96%*. Then came UK smaller companies (-10.21%*), European smaller companies (-9.78%*), Japanese smaller companies (-9.23%*) and North American smaller companies (-8.73%*).

It’s never nice when investments fall in value and there are various strategies investors use to either mitigate, or take advantage of, cheaper share prices.

Read our article on five ways to invest in falling markets.

VT Chelsea Managed Funds: Defensive positioning pays off

The VT Chelsea Managed Funds were all relatively cautiously positioned going into October. We believed equity markets were expensive and, as we are firmly entrenched in the late stages of the economic cycle and interest rates are rising – at least in the US - caution seemed to be a sensible stance to take.

Holdings in Premier Global Infrastructure and Polar Capital Global Insurance (on the Chelsea Selection), helped defend against the market falls, as did the holdings in bond funds that had low sensitivity to the rising interest rates: Nomura Global Dynamic Bond, for example, which is in the VT Chelsea Managed Monthly Income fund. It is run by the man who ran the L&G Dynamic Bond a few years ago when it too was on the Chelsea Selection. It is defensive in nature and has a yield of 4%.

So we were happy with the way the funds held up during the month.

Making the most of the falls

Market volatility can be unsettling, but it can also create opportunities. We used the market falls to top up on some holdings and reposition some of the VT Chelsea Managed funds slightly. 

The VT Chelsea Managed Monthly Income portfolio experienced the most changes. The equity weighting was already quite low, so we used the opportunity created by the October falls to add a position in Montanaro UK Income (another Chelsea Selection fund). This fund invests mainly in small and medium-sized companies, which have been hit quite hard, so we felt it could be good entry point. With an eye on future dividends it is also attractive as it specifically targets companies that will grow their dividends.

We also added to Schroder Asian Income Maximiser, M&G Global Dividend and Artemis Global Income.

The VT Chelsea Managed Aggressive Growth fund was left relatively untouched – just the holding in BlackRock European Dynamic was increased.

RWC Global Emerging Markets and Hermes Asia were topped up in the VT Chelsea Balanced Managed Growth fund and the VT Chelsea Cautious Managed Growth fund had its holdings in Fidelity Asia Pacific Opportunities and Jupiter UK Special Situations raised.

We also spent some time discussing the growth vs value conundrum. In the low-growth world environment we have been in for many years, investors have favoured funds that have higher growth potential, so funds with ‘growth strategies’ have been more popular and performed better. Value funds – those looking for companies with cheaper share prices – have struggled as stock market valuations have become more and more expensive.

However, in the UK and Japan, value has started to outperform in the past month, which has meant strong performance from the Jupiter UK Special Situations, JOHCM UK Dynamic and Man GLG Japan CoreAlpha holdings (all Chelsea Selection funds).

Growth still dominates in the US and Europe, though. If we are about to see a long-overdue ‘style rotation’, we would want a higher weighting to global value in the portfolio, so are considering the current weightings to Schroder Global Recovery, Artemis Global Income and Investec Global Special Situations. For now we are hedging our bets, with funds of both styles in the portfolio. What happens in the next few months could be interesting.

*Source: FE Analytics, total returns in sterling of all the Investment Association sectors, 1 October 2018 to 31 October 2018.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.
Published on 09/11/2018