BLOG: Steady returns in volatile times
The temptation to run for the exit to avoid potential losses coupled with a fear of losing out if things turn out to be better than we thought is a frequent dilemma facing investors. The market’s close scrutiny of every piece of economic data and knee-jerk reactions are unlikely to abate, as concerns about the slowdown in China and the Federal Reserve raising interest rates in the US loom alongside other macro headwinds.
At QuotedData, we think the investment trust structure encourages longer-term investing as managers can put their conviction bets in place without being too concerned about having to raise cash for redemptions.
One way to ride out the rough seas is to look at investment trusts that invest globally and those that aim not only to achieve an attractive income but also capital growth, while expanding the investment universe beyond the UK increases the range of potential opportunities.
Employing a multi-asset strategy improves diversification even further, which can help mitigate the risk of the overall portfolio. We are not allowed to recommend individual funds, but a couple of examples of trusts that fit that bill are Seneca Global Income & Growth Trust and F&C Managed Portfolio.
The Seneca fund aims to outperform 3 month LIBOR +3% over the longer term, with low volatility. Its historic yield is currently around 4%, which is middle of the pack for this sector according to analysis from QuotedData and reflects its low volatility strategy. The managers use yield as a principal determinant of value when making asset allocation decisions. They invest through closed and open-ended funds and also hold some direct UK equity exposure.
Their value approach involves identifying anomalies in the prices of UK companies that can be exploited in the hope that they will re-rate higher in the future. Discounts to net asset value (NAV) on funds can be an indication of value, but the managers also assess the value within the fund’s underlying holdings.
Sometimes the fund structure offers specific advantages. For example, Seneca Global Income & Growth holds both the BlackRock Continental Euro Equity Income and Schroder Euro Alpha Income. These are funds the manager likes and they have the added attraction of having share classes hedged back into sterling. Expanding the universe by looking at both open and closed-ended types of fund creates a larger pool of potential opportunities.
F&C Managed Portfolio Trust sits in the same Global Income sector as the Seneca fund. It has also achieved both income and growth whilst exhibiting lower volatility than its peers. This trust is separated into two pools – one for income and the other for capital growth. Investors can buy into either or both. The manager, Peter Hewitt, has been focused more recently on small and medium sized companies in the UK. He believes these are at attractive valuations and their dividend growth will be in the high single digits over the next year.
While F&C Managed Portfolio’s holdings in Asia and emerging markets have suffered more recently, the manager has conviction in his holdings in terms of future prospects for growth. This highlights the importance of a longer-term investment horizon, which allows ideas to take time to come to fruition if needs be.
The wider the pool of potential investment opportunities, the more flexibility managers have to identify the best ones. Whether you are struggling to predict if global growth is likely to be fragile or booming or you are worried that income focused investments may have run up too far, a diversified, multi-asset, income and growth strategy could provide the steadier, low volatility returns that will ease some of your fears.
James Carthew is research director at QuotedData