The problem with a boisterous White House is that it creates a lot of excitement in global financial markets. That may be great if you are trading the derivatives market, but it’s pretty uncomfortable if you are an ordinary investor trying to save for your retirement. This may be the time to champion the boring funds – those funds that don’t get any of the glory, but are the steady workhorses of your portfolio.
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Cash isn’t always king
Of course, the most boring option of all would be cash, but there are sound reasons why hiding in cash is not necessarily the right approach to market volatility. Above all, investors have a poor track record of buying and selling at the right time. While the idea of being able to sell out at the right moment and avoid market volatility is seductive, the statistics suggest that investors are far more likely to buy when markets are high and sell when they are low.
It’s also difficult to know when to reinvest: markets often bounce long before there is any real resolution to the crisis and missing just a handful of days in markets can dent your long-term returns. The S&P 500 has delivered an annual return of around 10% over the past 30 years, but missing the 10 best days in the market would have seen your return halve*.
Remain invested without excessive volatility
Boring funds can be a halfway house, allowing you to stay invested through the tough times, but without exposing you to significant volatility. For a fund to be properly boring, it needs to have certain qualities. Some flexibility is important. At the moment, this is particularly important for bond funds. Over the past few weeks, bond markets have been all over the place. UK government bonds have seen a significant sell-off, while other government bond markets have proved far more stable. It helps if bond fund managers have the freedom to adapt to different market conditions.
Examples of this type of fund would include the TwentyFour Dynamic Bond fund, which can invest across the full spectrum of fixed income assets, including niche parts of the market such as asset-backed securities. Manager Eoin Walsh says this flexibility is likely to be particularly important as the market responds to the unfolding Middle East conflict.
In the longer term, the team is also watching the consequences of AI closely: “Uncertainty is expected to remain high in the coming quarters and is only likely to begin to dissipate gradually as companies report concrete figures on forward-looking indicators, such as new subscriptions, backlogs of new orders and others that might be relevant for different industries,” says Walsh. They are cautiously positioned: “Careful credit analysis and active portfolio management remain critical,” he says.
Income as a source of stability
Income is another source of stability in a portfolio. Not only is it reassuring to have 3-4% of your investment coming back to you every year, but regardless of market conditions, income strategies have a natural defensiveness. Yield is expressed as a percentage of a company’s share price. Therefore, if the share price goes up, the yield comes down and companies will fall off the radar for income investors. This helps maintain discipline in a portfolio, moving a company away from higher-priced assets and into lower-priced assets.
A fund such as the JPM Global Equity Income fund provides a good balance of growth and stability. It holds companies such as Taiwanese semiconductor group TSMC, for example, and Chinese technology giant Tencent, but is highly selective on other parts of the technology sector, which remains its most significant underweight position. Manager Sam Witherow says: “Despite optimism around AI, elevated valuations warrant caution….realised benefits remain modest and market prices have run ahead of fundamentals.” The fund has larger positions in non-Magnificent Seven US stocks, plus Japan, Europe and emerging markets**. Its most overweight sectors are financial services, retail and utilities.
A value discipline also matters
‘Boring’ funds will also pay attention to valuations. During times of buoyant risk appetite, when investors are feeling confident, they may be happy to take a chance that a company’s growth story will pan out. However, their willingness to tolerate high valuations can evaporate at times of crisis. In the most recent market turmoil, some of last year’s winners have been the weakest performers as investors have taken profits.
There are some funds where this caution over valuations is a natural part of the investment process. This can mean that they look boring at times when global stock markets are frothy, but will prove more defensive at other times. The M&G Global Dividend fund, for example, prioritises companies that can grow their dividends over time and manager Stuart Rhodes invests with a strong emphasis on valuation. The fund likes to hold “quality defensive companies that will consistently increase their dividend every year and are very defensive in how they operate. However, there are times when these companies are very expensive, so we don’t want to be boxed in.” The fund will also include cyclical and growth companies where Rhodes sees opportunities.
What about the UK?
A final area may be the UK. Valuations are low, relative to other markets and, with a range of financials, industrials and basic materials, the UK market has a naturally defensive bias. The Jupiter UK Dynamic Equity fund is one option. It does forensic work on each individual company to find pockets of value in the market, focusing predominantly on large-cap stocks.
This is a moment when boring is good. There may be a touch of FOMO when markets are rising, but you can feel a little more smug during periods of weakness.
