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Hide or seek? Investing in volatile markets

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Summary

Investors need to use all the tools at their disposal when seeking investment returns

3 min read

Economic changes mean changing market dynamics. Making sure you can access the right approach for the right market conditions is one of the keys to increasing your chance of successful long-term investing.

Our asset allocation decisions consider the advantage of different sectors, regions and asset types, for example equities versus bonds. Passive funds have a role to play when seeking exposure to rising markets, but experienced fund managers can add value for investors by choosing stocks they think have a chance of outperforming the general market, a skill that’s especially valuable when markets are drifting sideways, or even falling.

2018 has seen the return of volatility to markets after 2017’s unusually benign conditions, and this typically suits more of an active, stock-picking approach.

Sven Balzer, Coutts Head of Investment Strategy, says, “Higher volatility not only means more swings in markets, it also means a greater variation between how different stocks perform. While passive funds – such as ETFs – benefitted from the strong trends last year, this year’s more complex market provides opportunities for stock pickers and active managers.”

At Coutts we look to benefit from active management in two ways:

  • Through high quality, actively managed funds 
  • Investing directly in equities ourselves through our ‘Global 30’ portfolio of equities

Investing in our own best ideas

The Global 30 portfolio is made up of our 30 best direct equity ideas. So far this year (to the end of July) it has returned 8.4% in sterling terms, compared to the 6.8% return from the MSCI World Index over the year-to-date. Since inception in 2016, it has returned 60.0% in sterling terms, compared with 57.5 % from MSCI World.

We look for companies that reflect the Coutts investment philosophy using a proprietary in-house methodology. In particular we look for value (assets that are inexpensive relative to their intrinsic value) and quality (well-managed and stable institutions, including a consideration of environmental, social and governance (ESG) issues).

Our highly experienced equity research team collects data and views from a number of leading external research providers, giving them a broad view of markets. They scour data on more than a thousand equities looking at:

  • Strong or improving ESG characteristics
  • Quality – notably profitability and cash generation
  • Value – cheap relative to their markets or their own history
  • Sentiment – notably rising earnings estimates
  • Quantitative factors – viewed positively by selected external research providers
  • Tactical considerations – an opportune entry or exit point based on trading data analytics

And once they have identified a potential investment, they undertake a thorough review to ensure that they fully understand the investment opportunities and risks. Finally, they use tactical signals to buy and sell efficiently to make the most of the positions.

“While passive funds – such as ETFs – benefitted from the strong trends last year, this year’s more complex market provides opportunities for stock pickers and active managers.”
Sven Blazer, Head of Investment Strategy

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Investing in the best managers

We also invest in external, actively managed funds that bring specialist knowledge to our portfolios. A specialist emerging markets fund manager, for example, has a network of contacts in local markets and specialist research resources that would take us years to build up.

We look for fund managers with a strong, repeatable process and a good team motivated to deliver long-term performance. We also consider the factors around the fund itself – is it too big to really make the most of the managers’ best ideas? Does it rely too much on a few ideas, or have a long tail of small positions dragging on performance?

In combining these factors (and others), and monitoring them over time, we look to identify managers that can add value to our client portfolios over the long term.

And our process seems to be working this year.

In 2018 to the end of July, our chosen UK equity fund managers collectively returned 4.1% after fees, compared to performance of 3.4% from an ETF tracking the FTSE All Share index. Our European equity funds, meanwhile, have generated 4% after fees, compared with 3.4% of a broad ETF tracking Continental European shares.

Please note, this is a very isolated period of past performance, and is not a guarantee of future performance. For full performance context, please speak to your private banker.
 

Delivering long-term performance across market conditions

Long-term investment performance – that will preserve and grow your wealth – relies on understanding markets and making sound decisions based on this understanding. Investing in sectors and regions you think could do well is one part of the picture and can add value for many investors.

But sound stock selection – especially in volatile markets of the sort we’ve seen this year – can add another dimension to performance and when done well, can further enhance returns. 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Last year’s markets saw passive funds benefit from strong investment trends. However, volatility has risen in 2018 and sideways, or even downward-trending markets now present active managers with the opportunity to outperform. This underlines how there’s more to generating investment returns, than just asset allocation. Good stock selection adds another layer of returns for investors willing to go the extra mile.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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