Three funds for challenging markets
Having enjoyed a relatively long period of time when the US stock market inched higher on a daily basis and other stock markets gently moved up and down by small margins, the more pronounced fall in stock market values we experienced in October will have come as an unwelcome surprise for many.
It will also have served as a reminder that investment strategies that can help preserve our hard-earned capital come into their own at times like these.
These investment strategies typically have capital preservation at their core, which means that they won’t fall as hard, or as fast, as the market does during times of stress. Although these funds are likely to also lag behind when markets are buoyant, this is a compromise that many investors are willing to make – and it is no coincidence that I have found myself drawn to these defensive funds during the course of my career.
While markets have stabilised so far in November, there is potential for more volatility to rear its ugly head once again over the coming months, as the UK negotiates its exit from the European Union and trade tensions escalate between the US and China. With this in mind, I thought it would be helpful to highlight three funds that typically come into their own in difficult markets.
Fidelity Global Dividend fund is a prime example. Manager Dan Roberts focuses on global companies which offer reliable cash flows throughout the economic cycle and have the potential to grow their dividends over time. He aims to keep drawdowns – the peak-to-trough declines in performance that occur over specific time periods – as low as possible. So when stock markets fall, this fund should fall less.
Since the fund launched in January 2012, it has experienced six periods of ‘down-markets’ – 12 month rolling returns when the global stock market fell rather than rose. Across these time periods, the value of the fund was up by an average of 6.6% while the MSCI AC World was down 1.2%.
Fidelity Global Dividend has also fared well since the start of this year – a period that includes the challenging month of October. The fund is up 5.1%, which compares to a 2.1% rise by the MSCI AC World index and a 0.65% fall by the average fund in the Investment Association’s (IA) Global Equity Income sector.
For those seeking exposure to the UK stock market, Evenlode Income has a strong track record of defending on the downside. Over the past five years, the fund has posted a maximum drawdown of 9%, which compares to 17.6% by the MSCI UK index.
Evenlode Income is also up 2.4% since the beginning of the year, which compares to a 5% drop by the FTSE All-Share and a 5.1% fall by the average fund in the IA’s UK Equity Income sector. Managers Hugh Yarrow and Ben Peters’ high conviction approach is based on the simple idea that quality will outperform over the long-term. So far, their theory has paid dividends.
Meanwhile, Stewart Investors Asia Pacific Leaders is known for its ability to deliver through challenging periods. It is worth noting that this fund can lag when markets are strong because the investment team does not chase high growth stories. Instead, they prefer to focus on quality, defensive businesses with strong governance – an approach which has paid off over the longer term. The fund has posted a maximum drawdown of 18.3% over the past five years versus 26.9% by the MSCI Asia ex Japan index.
Since the beginning of the year, it is up 1.1%. This compares to a 9.8% drop by the MSCI Asia Pacific ex Japan index and a 10.4% loss by the average fund in the IA Asia Pacific excluding Japan sector.
Looking ahead, it is a sensible idea to hold defensive funds in your portfolio – as well as those designed to make the most of growth opportunities. If investor sentiment turns sour, they are likely to come into their own.
Darius McDermott is managing director of Chelsea Financial Services & FundCalibre