How I am preparing for a stockmarket correction
8th November 2017 10:26
by Holly Black from interactive investor
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When Equilibrium's Mike Deverell built our Long-Term Growth portfolio in the spring, he was cautious about the stockmarket. Holly Black reports on what's changed since.
With only around half of his notional £100,000 invested in equities, and much of the rest in defensive absolute return strategies and alternative assets such as property and infrastructure, he is feeling very pleased with performance so far.
The portfolio has returned almost 4.8% since inception, tracking pretty closely with the
over that period, and just two of its holdings are in the red.The standout performer so far has been
, which has delivered an impressive 14.4% since the portfolio began on 1 April. Deverell says: "Europe has done surprisingly well, which I wasn't particularly expecting. With hindsight I wish I had invested some more into this fund."Deverell thinks Europe looks particularly appealing when compared to the US, which he still believes is looking expensive; he suggests many investors are starting to feel the same way.
"Investors compare the two regions; Europe looks to be much better value, and the economy has surpassed expectations."
His stance seems to have been vindicated by the fortunes of this portfolio's only exposure to the US. The
is virtually flat, having produced a measly gain of £2.21 since April.So, could this be the time to invest some more money into Europe? Deverell has £5,000 of the portfolio's assets in cash, ready to take advantage of any buying opportunity.
But he says: "Europe has gone very far very quickly, and I'm not sure it will be able to keep this up." So, for now, the allocation remains the same.
Despite Deverell's claims of caution, the highest weightings in the Long-Term Growth portfolio are to Asia and Japan - hardly traditional safe-haven regions.
Yet those exposures are risks which have paid off: both regions have had a positive few months. Indeed,
is up 9.9% so far; the fund is successfully tapping into the growth in middle-class consumers, particularly in China.The
is up 7.9%, as strong earnings growth starts to come through.Deverell says: "Some of the reforms put in place by prime minister Abe really seem to be working."
Hopefully the fund's strong performance can continue after long-standing manager Sarah Whitley retires. She leaves in April next year after 37 years with the firm.
But Deverell won't be adding any more to the Japan holdings as he thinks the weighting is high enough already. "We have more in Japan than most investors would, and you have to remember it's a risky market," he says.
UK smaller companies
After a lacklustre 2016, UK smaller companies have started to catch up with large-cap stocks this year, and investments in
and have benefited from that trend.The funds are up 8.1% and 10.8% respectively. Giles Hargreave's Marlborough fund has profited from the ongoing successes of AIM-listed holdings such as premium drinks maker
and document management firm .One of just two holdings with a negative return, the
suffered under mounting expectations that the Bank of England would hike interest rates before the end of the year. It did.However, other fixed income holdings have produced positive returns, despite the speculation.
is up 1.5% since inception, and 4%.Deverell says: "The TwentyFour team are really good at what they do. The fund has investments in financial bonds and the team are very good at finding niche investments which can do well regardless of interest rates."
While Deverell is largely pleased with progress so far, he has been disappointed with the performance of the
. Up 4.6%, it has just about managed to keep pace with the stockmarket. Holdings in big multinationals such as and have dragged on performance.With just 50% of assets in equities, the portfolio has a high allocation to absolute return strategies, where success has been mixed so far. While
has returned 5%, the has disappointed, down 0.4%."These funds have lots of different strategies incorporated into them. Sometimes they work and sometimes they don't, but the idea is that they make money over the long term," says Deverell.
With caution still in mind, he is keeping the high allocation to these safety nets in place: "This is a growth portfolio and we're trying to make sure we deliver that growth, but also that we are mindful of the risks out there."
There are no changes to the portfolio at this review. Deverell expects that by the next review there will have been a stockmarket setback and he will have been able to utilise that cash.
The problem is working out what could cause such a correction.
He says: "We have had all these political events we have been worried about - Trump and the elections and even North Korea - and markets just haven't reacted. The biggest risk will be something no one expects."
SOME CAUTION ON EQUITIES BUT NOT IN THE FAR EASTÂ Â Â Â Â Â Â | |||||||
---|---|---|---|---|---|---|---|
Name | Sector | Purchase price | Quantity bought | Value at | Current value (£) | Change since | Change since |
(£) | inception (£) | inception (£) | inception (%) | ||||
Cash | n/a | 1 | 5000 | 5,000 | 5,000.00 | 0 | 0 |
Royal London Short Dated High Yield Bond | Global high yield bond | 92.2 | 54.54 | 4,990 | 5,066.97 | 66.97 | 1.3 |
BlackRock Corporate Bond Tracker | n/a | 135.5 | 37.49 | 4,990 | 5,019.94 | 19.94 | 0.4 |
Jupiter Strategic Bond | £ strategic bond | 147.8 | 34.25 | 4,990 | 5,073.42 | 73.42 | 1.5 |
TwentyFour Dynamic Bond | £ strategic bond | 157 | 32.53 | 4,990 | 5,201.42 | 201.43 | 4 |
L&G Allstocks Index-Linked Gilt Index | n/a | 277 | 18.27 | 4,990 | 4,836.57 | -163.43 | -3.3 |
Kames Property Income | Property | 118.9 | 41.93 | 4,990 | 5,130.38 | 130.38 | 2.6 |
H2O Multi-Returns | Targeted absolute return | 140.1 | 36.64 | 4,990 | 5,423.49 | 423.49 | 8.5 |
Invesco Global Targeted Returns | Targeted absolute return | 1.2 | 4991.67 | 5,990 | 5,973.87 | -26.13 | -0.4 |
Old Mutual Global Equity Absolute Return | Targeted absolute return | 160.2 | 36.86 | 5,990 | 6,300.36 | 300.36 | 5 |
Lazard Global Listed Infra-structure | Equity - other specialist | 195.5 | 27.45 | 4,990 | 5,432.99 | 432.99 | 8.7 |
CF Miton UK Multi Cap Income | UK equity income | 260.2 | 16.53 | 3,990 | 4,323.21 | 323.21 | 8.1 |
Royal London UK Equity Income | UK equity income | 194.7 | 21.9 | 3,990 | 4,184.90 | 184.9 | 4.6 |
Lindsell Train UK Equity | UK all companies | 374.3 | 11.42 | 3,990 | 4,239.94 | 239.94 | 6 |
Marlborough Special Situations | UK smaller companies | 219.5 | 20.1 | 3,990 | 4,431.29 | 431.29 | 10.8 |
Baillie Gifford Japanese | Japan | 295.3 | 13.97 | 7,990 | 8,635.83 | 635.83 | 7.9 |
BlackRock European Dynamic | Europe ex UK | 160.4 | 33.99 | 4,990 | 5,719.91 | 719.91 | 14.4 |
Vanguard US Equity Index | n/a | 202.7 | 19.58 | 5,990 | 6,002.21 | 2.21 | 0 |
Schroder Asian Alpha | Asia Pacific ex Japan | 362 | 16.35 | 7,990 | 8,790.00 | 790 | 9.9 |
99,820 | 104,786.70 | 4,786.71 | 4.8 | ||||
Notes:Net value includes £10 broker fee. Inception date of the portfolio 1 April 2017. Source:Equilibrium LLP, as at 1 October 2017       |
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This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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