How fund managers have responded to highly volatile markets

It’s been more than a month since conflict broke out in the Middle East, causing stock markets to whipsaw over developments in the Iran war.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

At the time of writing (8 April), markets have rallied strongly after the US and Iran agreed to a conditional two-week ceasefire, which includes the reopening of the Strait of Hormuz, through which around 20% of the world’s oil and natural gas flows. The Brent crude oil price dipped around 13% to around $95 a barrel. However, the oil price remains notably higher than the $70 a barrel level it was trading at prior to the start of the conflict at the end of February. 

While the mood music may now have become more risk-on, overall stock markets experienced a notable rise in volatility over the past month or so. As covered in a Fund Focus article, the risk-off period has led to some unusual behaviour among the classic defensive investments – with government bonds and gold – not doing their jobs as diversifiers.

Gold’s strong gains over the past couple of years prompted some profit taking, particularly among hedge funds in order to de-risk portfolios. Tom Becket, co-chief investment officer at Canaccord Wealth, notes that investor enthusiasm for gold and its more volatile cousin silver resulted in both metals switching from “being safe-haven investments to investments in speculation”.  

For fund managers, the mantra typically adopted during more volatile times is “keep calm and carry on”. Investing, after all, is a long-term game, and over time stock markets do tend to recover their poise.

While the more uncertain geopolitical environment is unwelcome and the humanitarian element is most important, the reality is that such a backdrop also creates some potential stock market winners.

Insurance policies

Jacob de Tusch-Lec, fund manager of Artemis Global Income, has been adding to oil shares “as an insurance policy”.

In a recent video interview with interactive investor, de Tusch-Lec said: “We know that a year from now, maybe the oil price is back to $50, $60, $70, not the $100 we’re looking at now. We’re going to look back and think that it really wasn’t a game changer for the sector.

“But there is that low probability that something will break, that oil will go to $150, for example, and you want to have that oil exposure in your portfolio as an insurance policy.”

• Ian Cowie: why I’ve bought Scottish Mortgage
• Where investment professionals are investing their ISA
• Where to look for income during turbulent times

However, de Tusch-Lec stressed the importance of striking an appropriate balance.  

“Like any insurance policy, you hope you’re not going to use it and you [might] think back and ask why you spent the money on it. But that is what portfolio construction is about. In theory, we’d like just to sit back and do nothing.

“In reality, with a global portfolio that’s somewhat driven by macro trends, there’s always some kind of portfolio insurance you’re going put in there. You take a bit of profits in things that have done very well and buy some insurance.”

Abby Glennie, co-fund manager of Aberdeen UK Smaller Companies Growth Trust (LSE:AUSC), also emphasised the importance of not being too drawn into short-term volatility.

Glennie, who also recently interviewed as part of interactive investor’s Insider Interview series, said: “First, it’s very sad to see the conflict that’s evolving and the people who are caught up in that.

“As fund managers, we have to be cautious of this in that the market is being very short-term focused at the moment, but these things can turn quite quickly. So, you don’t want to be too drawn into that.

“We went into this crisis with quite a lot of balance in the portfolio and we’ve been using risk tools to help do that. So, I think we were quite well positioned for that even before this kicked off, and we continue to look at quality always as part of our investment process. In times of difficulty and volatility, that tends to stand up quite well.”

• How to build a higher-risk ISA portfolio
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• How to build a medium-risk ISA portfolio

Glennie, however, is also looking at areas of opportunity. She said a recent new holding being built up is online trading platform Plus500 (LSE:PLUS). In addition, she highlighted Paragon Banking Group (LSE:PAG), Jet2 (LSE:JET2) and Ashtead Technology (LSE:AT.) as potential bargains.

Clive Beagles and James Lowen, fund managers of JOHCM UK Equity Income, have added to two group of stocks.

The first are companies that the pair expecttobenefit from prevailing events, namely Centrica (LSE:CNA), TP ICAP (LSE:TCAP), and Vesuvius (LSE:VSVS).

On Centrica, Beagles and Lowen say it “will benefit both in the near term from higher gas and electricity prices in certain parts of its upstream businesses and stronger profits in its trading arm”.

The second group of stocks the duo have added to are those described as being “heavily dislocated”.

“Forterra (LSE:FORT), which had reasonable results, started a share buyback and grew its dividend more than expected. It now has 150-200% upside to our estimate of normalised earnings on a price-to-earnings (P/E) ratio of 12x.

“We also added to Bellway (LSE:BWY)...it is trading on a lower multiple than during the Liz Truss period and is remarkably cheaper than during Covid, when initially no homes could be sold.”

Software sell-off: responses and potential bargains

Ahead of the rise in geopolitical tensions, a software related sell-off occurred. This stemmed from artificial intelligence (AI) business Anthropic launching Claude Cowork, an agent which can perform routine tasks relevant to areas such as the legal sector, and is viewed in some quarters as a disruptor of enterprise software businesses.

Royal London Sustainable Leaders, managed by Mike Fox, suffered its fair share of software-related pain, with London Stock Exchange Group (LSE:LSEG) and RELX (LSE:REL) among its top 10 holdings. Also held outside the top 10 is Experian (LSE:EXPN).

Fox, also recently appeared in our Insider Interview video series, in which he said that he was keeping an open mind rather than an attempting to “buy low”.

“Our view is that the companies we own have very unique data sets and very strong franchises and therefore may even benefit from AI, but I do think it’s become a more complicated area than it has been. So, I think it’s really important when new developments come along that you do keep an open mind as to what might happen next.

“We need to accept that the environment for some of these companies has changed. I think sometimes it’s right to wait.

“While the default can be ‘something has fallen, something is cheaper, you should buy more’, actually, a lot of the time that’s correct. But I worked through the internet era, the financial crisis, and Covid. You get these periods where the fundamental construct of markets and sectors begins to be challenged, and sometimes you’re just better off waiting to see what happens next. At that point, you can buy the shares tomorrow or the week after - there’s no pressure to have to do something today.”

• Top tactics on how ISA millionaires invest
• Unloved adventurous areas that warrant a closer look
• Alternatives to the most-popular ISA funds

However, Brendan Gulston, co-manager of WS Gresham House UK Multi Cap Income fund, has been looking to take advantage of AI-related businesses that, in his view, were unfairly impacted by the software sell-off.

Gulston highlights Fintel (LSE:FNTL), which provides integrated data, insight and distribution enablement platform across a regulated financial adviser network.

He says: “Alongside this strong positioning, Fintel has also demonstrated robust growth in subscription revenues, strategic progress in product simplification, and successful integration of acquisitions, which should support long-term earnings expansion and cash generation.

“The recent announcement of Fintel’s joint venture with fintech company, Intellect Design Arena, to launch an AI-led advisory platform in the UK further highlights its ability to utilise AI as an enabler of growth.”

Two other shares Gulston says are potential bargains are Netcall (LSE:NET) and Diaceutics (LSE:DXRX).

He notes that Netcall is a provider of AI-driven process automation and customer engagement solutions that “is embedded within operationally complex organisations across sectors including healthcare, local government and financial services, helping them manage processes and deliver services more efficiently”.  

Meanwhile, Diaceutics “uses AI and machine learning to process and standardise around 500 million patient data points sourced from medical insurers, laboratories, and healthcare providers”.