Nowhere to hide from volatility?

Stuart Canning of M&G Investments reflects on how 2018 has been a volatile year across regions and asset classes. As a result, absolute return funds have emerged as a likely solution.

2018 makes the case for ‘absolute return’ funds

While US stockmarkets have enjoyed extended rallies, sharp corrections in February and October showed investors’ faith is still fragile. Other regional stockmarkets have suffered more frequent bouts of volatility. Meanwhile, traditional ‘safe-haven’ government bonds from developed markets have failed to consistently provide investors with the protection they might normally expect. US Treasuries have felt the impact of US interest rate rises, and yields on government bonds from Germany, Japan and the UK have limited room to reduce further.

The long and short of it

At the heart of many investment strategies is the idea that a combination of long positions in equities and bonds should provide sufficient diversification. However, after a decade of ultra-loose central bank policies in developed economies, government bond valuations appear to be on a medium-term downward trajectory. This may explain why, when stockmarkets have suffered losses, bonds have not always sheltered investors.

So, is there anywhere to hide from volatility? A flexible investment approach is likely to be needed to construct an efficiently diversified portfolio in today’s environment, where interest rates are expected to rise and a presumed negative correlation between equities and bonds may not consistently hold true, see below.

 

Historical correlation between FTSE All-Share Index and FTSE Actuaries Gilt Index (all stocks)

Historical correlation between FTSE All-Share Index and FTSE Actuaries Gilt Index (all stocks)

Source: Thomson Reuters Datastream, 14 September 2018.

Past performance is not a guide of future performance

 

Aiming for a smoother path

Absolute return funds have emerged as a potential solution in recent years. These funds aim to deliver positive returns over the medium term in a variety of market conditions. They are designed to achieve this through their ability to take both net long and net short positions at asset class level, meaning they have the potential to deliver positive returns in both rising and falling markets.

As with any type of investment, positive returns are not guaranteed. Rather, these funds aim to provide cautious investors with a smoother investment journey than other funds that may not have the flexibility to weather volatility or preserve capital in market downturns.

The fund may use derivatives with the aim of profiting from a rise or a fall in the value of an asset (for example, a company’s bonds). However, if the asset’s value varies in a different manner, the fund may incur a loss.

M&G Global Target Return Fund

In 2016, we launched the M&G Global Target Return Fund. It aims to deliver a total return (combined income and capital growth) of at least cash rates* plus 4% per year before any charges are taken, over any three-year period and in any market conditions. As with all absolute return funds, the value of investments and income from them will rise and fall. This will cause the fund price, as well as any income paid by the fund, to fall as well as rise. There is no guarantee the fund will achieve its objective, and you may not get back the amount you originally invest.

We aim to achieve positive returns by investing in a wide range of assets, including equities, fixed income securities and currencies from both developed and emerging markets. Changes in currency exchange rates will affect the value of investments. We believe the flexibility of our approach should provide us with the ability to capture investment opportunities and diversify portfolio risk, whatever the investment environment ahead. The fund allows for the extensive use of derivatives and this may result in leverage. In such situations performance may rise or fall more than it would have done otherwise. The fund may be exposed to the risk of financial loss if a counterparty used for derivative instruments subsequently defaults.

*Cash rates are based on three- month GBP LIBOR, the rate at which banks borrow money from each other.

Issued by M&G Securities Limited

For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. OCT 18 / 313101