Not all funds perform badly when global stock and bond markets enter a prolonged downturn. Here is a list of funds that could hold their own even during times of widespread turbulence.
It has been an uneasy couple of months for investors of equity unit trusts and exchange- traded funds (ETFs), many of which have seen their year-to-date (YTD) gains abruptly turn into losses after a devastating storm hit global stock markets in recent weeks.
The global stock market rout, triggered by the severe slump in China’s equity market as well as heightened fears that the world’s secondlargest economy is slowing at a faster-than-expected pace, has brought about bear-market downturns in many Asian and emergingmarket bourses after equity prices fell more than 20% from their recent peaks. Developedmarket equities, however, have been more resilient during the recent carnage.
As at Sept 11, the worst-hit Singapore-registered funds on a YTD basis were those invested in the equity markets of Brazil, Turkey, Indonesia and emerging-market Latin America, all of which turned in losses of between 34.5% and 22.21% in Singapore dollars, according to data from global fund research firm Lipper. The only groups of equity funds still in positive territory for the year as at Sept 11 were those that invest mainly in US, European and Japanese stocks. As in most stock-market downturns, defensive healthcare and biotechnology funds were the least affected by the worsening macroeconomic situation. (See table for more information on the YTD performance of fund groups.)
Although stock markets around the world have rebounded since late August and have been trading sideways, investment experts reckon that more volatility could be on the cards for global equities. “A sense of calmness has returned to markets, but nobody seems to feel comfortable about it. The lack of comfort that many investors have with the market at this point probably stems from the awareness that pockets of turbulence rarely travel alone, implying that periods of higher volatility on their own already increase the probability of further near-term turmoil. Obviously, the perceived fragility in the current market environment is also influenced by the lingering macro questions on the table,” notes Valentijn van Nieuwenhuijzen, head of multi-assets at European fund house NN Investment Partners, in a recent report.
The main lingering macro issues that many global investors are worried about include widespread economic weakness in emerging markets, which could weigh down the growth momentum of developed economies; the impact on global financial markets when the US Federal Reserve finally starts to hike interest rates; and supply-demand imbalance in the oil market, according to Van Nieuwenhuijzen. “What other policy magic will be unveiled in Europe, Japan or China to support market sentiment and ease financial conditions further?” he asks.
Fund strategy
To be sure, fearful investors, who are worried that a full-blown bear market is on the cards, could take advantage of the current period of market instability by reducing risk in their fund portfolios to buffer against future turbulence, according to fund experts. They could consider switching to long/short equity funds, volatility-managed ones or more diversified or lower-risk products such as balanced or multi- asset funds with exposure to asset classes such as fixed income, which tends to do relatively well in an equity bear market.
Fund investors with significant exposure to equities and who have a strong view that the current global stock-market malaise could last for a while could also move some of their money into cash funds to protect their capital. The adventurous ones could consider hedging part of their equity exposure by buying investment products such as those that benefit from a fall in stock prices. The locally listed dbx-trackers S&P 500 Inverse Daily UCITS ETF, which has an inverse price correlation with the Standard & Poor’s 500 index, is one such product. “There is really a lack of instruments that investors can go into if the markets are moving downwards; perhaps inverse ETFs. But the problem with such funds is that you have to get your timing right,” warns Daryl Liew, Singapore head of portfolio management at wealth and asset management firm Reyl Singapore. The db x-trackers S&P 500 Inverse Daily UCITS ETF was the best-performing Singapore-registered fund over the past three months, turning in gains of 11.1% in Singapore dollar terms as at Sept 11.
“Periods of volatility can be difficult for equity fund investors, as large swings can often lead to mark-to-market losses at a time when market volatility [heightens] after a period of relative calm. For investors who have significant exposure to equity funds, it is time to take a step back, revisit their long-term investment objectives and make sure that they have the appropriate strategic asset allocation that is commensurate with their risk tolerance,” says Wing Chan, director of manager research for fund research firm Morningstar Investment Management Asia.
On the other hand, long-term-focused fund investors with little exposure to stocks could consider buying into their preferred equity unit trusts and ETFs during periods of market weakness to take advantage of lower prices via the dollar cost averaging method, which allocates a fixed amount of investments at regular intervals such as monthly, quarterly or yearly. “Stock-market falls boost the medium-term return potential from shares simply because they make shares cheaper, and once share markets bottom, they are invariably followed by a strong rebound. But trying to time the bottom is always hard, so averaging after falls makes sense,” says Shane Oliver, head of investment strategy and chief economist at Australian investment house AMP Capital.
Chan of Morningstar offers similar views, saying that although equities are generally riskier and more volatile than bonds, they do generate higher returns over the long term for patient investors who can weather the volatility associated with this asset class. “There are certainly different ways for fund investors to hedge against a bear market. A high- quality government bond fund, for instance, often provides a very good hedge in a down market. However, it is very difficult to know when to switch into such funds or products before a full-blown bear market. So, from a personal investing standpoint, it is important to have a well-thought-out, diversified investment portfolio that strikes a balance between one’s investment objectives and risk tolerance,” notes the Morningstar director.
Unit trust picks
Without a doubt, diversifying into bond funds to help stabilise the fund investor’s portfolio is an option when their entire portfolio consists of only equities, says Ho Song Hui, research manager at online fund distributor Fundsupermart. com. But with the Fed likely to raise US interest rates by year-end, bond funds are not without risks. That is why Ho is recommending a short-duration bond fund such as the Nikko AM Shenton Short Term Bond Fund, which has lower interest-rate risk than other bond products.
“For fixed-income funds, the short duration segment continues to be a good segment for investors seeking shelter from volatility in equity markets. While interest-rate risk is a problem for many fixed-income fund, given the impending rate hike by the US Federal Reserve, the Nikko AM Shenton Short Term Bond Fund adopts a laddered approach in terms of bond maturities, which should lead to smaller immediate mark-to-market losses when interest rates eventually increase,” Ho tells Personal Wealth. The Nikko AM Shenton Short Term Bond Fund was up 1.31% this year in Singapore dollar terms as at Sept 11.
While no fund will be able to escape a global market rout unscathed, certain equity products may be better placed than others to withstand volatile and tough times, according to Ho, who is also recommending two equity funds with long-short strategies. They are the Neuberger Berman US Long Short Equity and Henderson Horizon Pan European Alpha Fund.
“For equities, the Neuberger Berman US Long Short Equity fund and the Henderson Horizon Pan European Alpha Fund are likely to offer investors better protection than traditional long-only equity funds, owing to their ability to reduce their market exposure by short-selling various financial instruments such as index futures, CFDs [contracts for difference] and direct stocks,” says Ho. The Neuberger Berman US Long Short Equity fund and the Henderson Horizon Pan European Alpha Fund were up 3.4% and 2.15% respectively this year in Singapore dollar terms as at Sept 11.
Equity funds with long-short strategies can provide investors with “lower drawdowns and volatility” during stock-market downturns, observes Ho. “Those are the ingredients necessary for a defensive approach to investing in equities. Investors worried about a potential strengthening of the Singapore dollar against the US dollar and euro could opt for the Singapore dollar-hedged share class for the respective funds, which allows one to express a negative view on the US dollar and euro respectively.”
Liew of Reyl Singapore also agrees that alternative products such as hedge funds as well as long/short equity and fixed-income funds can help to reduce the overall risk of an investment portfolio as well as deliver positive performance even when financial markets enter a difficult phase. Nonetheless, he says his team is not holding an ultra-bearish view of the global equity markets. “We continue to hold on to our equity positions, and could even be looking to increase them, depending on how things pan out in the next few weeks. We continue to prefer Europe and Japan within the developed markets.”
This year, Singapore-registered US, European and Japanese equity funds, which delivered average gains of 3%, 8% and 10% respectively, have outperformed Asian and emerging-market- focused unit trusts and ETFs. Many investment experts reckon that developed-market equities will continue to turn in a decent performance over the next 12 months, while those in emerging markets will underperform. They argue that the US economy still looks robust, while monetary policies in Europe and Japan continue to look ultra-accommodative with ongoing, large-scale quantitative easing, which tends to support equity markets.
Dominic Rossi, global chief investment officer of Fidelity Worldwide Investment, for instance, continues to be bullish about US stocks, especially sectors that are focused on innovation such as healthcare, technology, new media, electronic gaming and robotics, all of which are growth areas, he says. Rossi tells Personal Wealth that US stocks will surpass their peak levels achieved earlier this year towards end-2015 or early 2016. Next year, the S&P 500 could hit 2,400, he predicts. Most Singapore-registered global equity funds have the bulk of their exposure in developed-market stocks, and long-term fund investors who can stomach short-term volatility could tap these funds to ride the upside of developedmarket equities.
One Singapore-registered global equity fund that has been revitalised of late under a new management team helmed by William Low is the Nikko AM Shenton Global Opportunities Fund. Low joined Nikko Asset Management as head of global equities in August 2014, having been director of equities at Scottish Widows Investment Partnership since 2011. The fund manager, who has nearly 30 years of investment experience, manages the Nikko Shenton Global Opportunities using a concentrated investment style, investing only in the 40 to 50 “high-conviction” and well-researched stocks able to deliver “alpha”, or excess returns, to investors over the long term. This year, as at Sept 11, Nikko Shenton Global Opportunities was the best-performing Singapore-registered global equity fund after turning in gains of 8.17% in Singapore dollar terms versus average YTD losses of 0.35% achieved by its peers. Low tells Personal Wealth he is confident his high-conviction style of investing will continue to generate a decent performance in both up and down markets. (For more of Low’s investment strategy, read next week’s Personal Wealth cover story.)
Singapore-registered Asian equity funds were down nearly 5% this year as at Sept 11. But long-term fund investors who are invested in these regional equity funds should not sell out at current prices, Ho advises. “At this juncture, rather than panicking and selling at stressed prices, investors with the requisite risk appetite and ability to stomach volatility should look to acquire assets in Asia, given the depressed sentiment, cheap valuations and high expected returns. While markets generally view a bear market as a negative, investors need to remember that it is during bear markets and periods when fear grips markets that one is able to buy quality assets at cheap valuations.”
Fund investors keen to add money to Asian equity funds should adopt a dollar cost averaging method when buying into these investment products, given the volatile nature of regional markets. At the moment, the First State Asian Growth Fund and the Schroder Asian Growth Fund are the Singapore-registered regional equity unit trusts recommended by Fundsupermart.
For sector plays, funds that invest in defensive yet growth-oriented industries such as biotechnology, pharmaceuticals and healthcare, whose outlook is less dependent on economic cycles, could also offer investors downside protection in a long-drawn-out downturn in global equity markets. Of the equity sectors, healthcare has the best ability to mitigate losses in market downturns, observes Norman Boersma, chief investment officer of Templeton Global Equity Group, who recently spoke to Personal Wealth. Indeed, during the bear markets of 2000 to 2002 and 2008, global healthcare and biotechnology funds outperformed many other equity funds. This year, these two groups of funds have also been flying high despite the downturn in global equities.
Singapore-registered biotech funds — the best-performing group of funds on a YTD basis — generated average gains of 22.43% in Singapore dollar terms this year as at Sept 11, while global healthcare funds returned 14.43% over the same period. Among Singapore- registered global healthcare funds, the award-winning United Global Healthcare Fund is a proven winner. As at Sept 11, it was the best-performing fund in the global healthcare sector on a YTD (+18.4%), oneyear (+36.7%), three-year (+133.89%) and five-year (181.06%) basis.
Besides short-term bond products, long/ short equity funds and healthcare unit trusts, diversified multi-asset funds with exposure to a number of different asset classes could help to reduce the overall volatility in an investor’s portfolio. “Adopting a diversified portfolio with inter- and intra-asset class diversification is one of the best ways to hedge against a full-blown bear market,” says Ho. A Singapore-registered multi-asset fund that the Fundsupermart research manager likes is the Deutsche Invest I Multi Opportunities, a multi-asset fund-of-funds.
“While there are many multi-asset funds available in the market, one product that has caught our eye is the Deutsche Invest I Multi Opportunities fund. While appearing to be yet another multi-asset fund, the Deutsche Invest I Multi Opportunities fund is the holder of a very successful long track record that has demonstrated the ability to both actively and significantly move across asset classes, depending on market conditions,” says Ho.
Prior to the 2008/09 financial crisis, this fund had invested up to 80% of its portfolio in equities, Ho observes. “This position was eventually reduced to as low as 2%, as the manager took profits and reduced exposure to equity whilst boosting their holdings of bonds, cash and/or cash equivalent instruments to 70% to 80% of the portfolio in November 2007,” he says. “In late 2008, the manager started bargain- hunting and gradually increased the portfolio’s equity allocation.”
The Deutsche Invest I Multi Opportunities’ active management approach has protected investors’ capital during periods of market stress and heightened volatility. Besides preserving capital during the downside, the subsequent deployment of capital allowed the fund manager to capture opportunities when others were fearful, Ho points out. “These are the traits of active management, which is what investors should seek in an asset manager,” he adds.
This article appeared in the Personal Wealth of Issue 696 (Sep 28) of The Edge Singapore.