As we started to write this article in the week commencing February 23, the world looked a very different place to what it does today. We have long said that we wanted the VT Chelsea Managed fund range to be very diversified, with different buckets of risk-on and risk-off investments. We also want as many sources of income as possible for our Monthly Income fund.
A week or so later (March 3), markets are very fast moving and increasingly volatile, following the US and Israel’s decision to bomb Iran. Last week, US President Donald Trump laid out his goals for Iran and said the US campaign had been projected to last four to five weeks but could “go far longer than that.”
After some initial stoicism towards these recent events, markets began to sell off on March 3. However, it is important to remember markets will always experience volatility and corrections as a natural part of an economic cycle – these declines are usually temporary, resetting valuations and offering opportunities for long-term investors.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
How the VT Chelsea Managed funds prepare for different market environments
As markets have continued to grind ever higher in the past couple of years, our messaging has been clear – take advantage of opportunities as they arise but maintain a balance and diversification that allows us to be prepared for uncertainty in markets. We own numerous investments which are designed to offer protection to investors should such events unfold.
One of the changes we made in 2024 to counteract growing geopolitical uncertainty was the purchase of the Future of Defence ETF in our portfolios – this offers investors exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending. One of Trump’s earliest campaign messages before getting into The White House was for Europe to spend more on defence; we also recently hit the four-year anniversary of the Russian invasion of Ukraine, a war which, unfortunately, shows no sign of ending any time soon.
We’ve also been backers of gold as a strategic long-term asset, as it offers a degree of security to investors. Additionally, we’ve increased our exposure to short-dated bonds and had a slightly larger exposure to cash. We’ve also been adding to our oil position amid the uncertainty in the Middle East. The shutdown of the Strait of Hormuz, a key shipping route for oil and liquefied natural gas (LNG), could have major consequences. Around 20% of the world’s oil transits through that passage and its closure has prompted broader fears of knock-on inflation in energy prices. If this key route is shut for a few days, it will not be much of a problem – however, a three-month closure could see oil prices rise markedly.
In a nutshell, we’ve been active and cautious in our approach. This applies to equity valuations as well, where, after a period of US equity outperformance, we have been rotating into the likes of Asia, Emerging Markets and Europe as returns have broadened out globally.
Cautious and uncorrelated
As multi-asset managers, we recognise the need for uncorrelated returns as a way of bringing consistency in performance. A good example of us scouring the market for unique opportunities is our recent purchase of TRIUM Alternative Growth, an offering which looks to generate capital growth whilst exhibiting low correlation to equity markets over a rolling three-year period.
It is a specialist, complex vehicle and we have invested in it in both our Cautious and Balanced funds because we believe it behaves like a true absolute return fund in that it should produce low single-digit returns in normal market conditions but continue to produce positive returns when other markets fall.
Income Diversification
Our Monthly Income fund continues to pay an attractive yield of 4.82%* by investing across geography, asset classes, market-cap and specialist vehicles. An example of this is our investment in Biopharma Credit, a trust which lends money against future royalties on biopharma drugs. It is uncorrelated to other assets and produces an attractive yield of 8-10%*.
We see lots of ideas of this ilk, which allows us to be positioned in such a way that we are prepared for any scenario that plays out.
A final message to investors
Those who have invested in our funds over the long term have seen that we have been both active and cautious during periods of market strength and volatility. It is good to have a bit of cash in this current environment (7-8% across the funds)* as cash does not fall and means we are able to tap into opportunities in these periods of uncertainty.
Markets do have their challenges, but we must remain calm. When Russia invaded Ukraine in February 2022, the Euro Stoxx 50 (which represents Eurozone blue-chip companies considered as leaders in their respective sectors) fell over 12%** in the following couple of weeks; those who held firm have since seen the index rally almost 100%***.
It pays to be patient, and we believe we are well positioned regardless of the direction the market takes from here.
