Preserving capital

We hear from investment companies who aim to preserve investors’ capital and limit volatility.

Investment companies have been adapting to meet investors’ needs for 150 years. As well as offering exposure to markets around the world and specialist asset classes like infrastructure and private equity, there are several companies in the Flexible Investment sector whose aim is to limit volatility and preserve investors’ capital.

With the return of market volatility, the Association of Investment Companies (AIC) has gathered comments on this approach and the outlook for markets from investment companies with multi-asset and capital preservation strategies.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies said: “Recently, it’s been a turbulent time for markets and it’s useful to know about the investment companies whose objective is to protect investors’ capital and limit volatility, come rain or shine. Of course, no-one can second guess the markets’ next move, and it’s important for investors to take a long-term view and have a balanced portfolio. But the potential to protect value and limit market swings could be a useful tool depending on an individual investor’s needs.”

Hamish Baillie, investment director at Ruffer Investment Company said: “Our near obsessive principal objective is to protect our investors’ capital. Unusually, we measure this over the very short timescale of 12 months. The principal behind this is that we would like to be genuinely uncorrelated with equity markets; our investors typically hold shares in the company alongside an equity focussed portfolio and so we want to be there to be called upon when other assets have fallen in value. The nature of the power of compounding means that superior long-term returns will be achieved by preserving capital in the bad times.”

Peter Elston, chief investment officer of Seneca Global Income & Growth said: “The last 40 years have been very easy for financial markets and thus for investors, driven as they have been by falling inflation and interest rates. It is very possible that we are entering a more difficult period, and multi-asset funds, unlike single asset class funds, can help navigate these choppier waters.”

Alastair Laing, manager of Capital Gearing said: “Our approach could be described as extremely circumspect. Our portfolios combine a restrained exposure to equities and a majority exposure to short duration high quality bonds. The cost of timidity is forgone opportunity today. However, the cost of greater courage is all too often forgone opportunity at the time it really matters. The best returns across the cycle come from increasing equity exposure after a bear market. In order to exploit those golden opportunities you need to make sure you are not fully invested when you discover where the cliff edge is.”

Katy Thorneycroft, co-manager of JPMorgan Multi-Asset Trust plc said: “We aim to construct a portfolio which is designed to be flexible with respect to asset class, geography and sector of investments and will seek to achieve an appropriate spread of risk by investing in a diversified global portfolio of securities and other assets. This flexibility allows us to take advantage of the best opportunities to generate income and growth. We take a medium to long-term view of markets, acting on investment themes that we believe are appropriate for such periods.”

Outlook for markets

Hamish Baillie, investment director at Ruffer Investment Company said: “We are very worried about the outlook for equity markets. There are pockets of value, but many parts of the market are overvalued and the combination of structural fragilities in markets, lower levels of liquidity and the rise of unthinking passive strategies means that the next downturn is likely to be particularly vicious. Perhaps most worryingly, bonds may not provide the offset that they have done for the last 25 years and so a typical balanced portfolio will find that both sides of the fear/greed strategy fall in value.”

Peter Elston, chief investment officer of Seneca Global Income & Growth said: “Economies are in the late stage of their cycle, and low or falling unemployment is translating into rising wages. This means tighter monetary
policy, which is putting pressure on financial asset prices. A global recession is not imminent, but one should be preparing for it. Brake ahead of the bend, not when you reach it.”

Alastair Laing, manager of Capital Gearing said: “There is a growing consensus that the current macro-economic and financial environment is ‘late cycle’. Some indicators are relatively simple to observe, namely that the
current US economic expansion and equity bull market are both the longest since the second world war. Other indicators are based on historic echoes such as the Federal Reserve embarking on a tightening cycle resulting in a flattening yield curve. These all point to a cliff edge out there, shrouded in the mist that is the future.”

Katy Thorneycroft, co-manager of JPMorgan Multi-Asset Trust plc said: “Global growth is set to remain above trend but changes to US trade policy and the impact of higher US rates have increased the risks to our outlook. We retain our pro-risk tilt, anticipating an economic and earnings environment consistent with equity outperformance, but moderate our conviction and will look to trim equity positioning a little.”

Asset allocation

Hamish Baillie, investment director at Ruffer Hamish Baillie, investment director at Ruffer Investment Company said: “Reflecting the above, we are running a relatively low equity weighting at 40% focussed on cyclical and value stocks and some special situation growth businesses. Japan has been a particularly productive hunting ground in this respect. We hold 33% in index-linked bonds in the UK and the US to benefit from an increase in inflation greater than any rise in interest rates. 7% is invested in gold and gold mining shares. Our answer to the risk of a correlated sell-off in bonds and equities is to hold options to protect against rising bond yields and falling equity prices.”

Katy Thorneycroft, co-manager of JPMorgan Multi-Asset Trust plc said: “We expect US policy rates to continue steadily tightening overcoming quarters, but even then monetary policy will remain accommodative and supportive forrisky assets into early 2019. Within asset classes, we have a preference for US stocks over most other regions. We are more cautious on emerging markets and we see further headwinds from trade tensions, a stronger US dollar and rising US rates. We continue to see opportunities for returns and diversification within infrastructure.”

Peter Elston, chief investment officer of Seneca Global Income & Growth said: “We started reducing Seneca Global Income & Growth’s equity exposure some time ago from an overweight position and we are now quite
underweight. We’ll continue to move further underweight over the next year or two, as the cycle matures.”


Hamish Baillie, investment director at Ruffer Investment Company said: “We have the benefit (or should that be the burden of expectation) that accompanies a long track record having experienced two bear markets. Typically, our strategy will underperform in the latter stages of a bull market (as was the case in 1999 at the height of the tech bubble and from mid-2006 to early 2007 before the financial crisis) but it comes into its own at inflection points. We have a good record of performing in a downturn and then capitalising on that when the market bottoms and starts to recover.
Ideally, we would like to produce steady positive returns regardless of the direction of the market. Of course, no economic downturn is the same as the last one and so the investment process and philosophy is more important than the track record.”

Peter Elston, chief investment officer of Seneca Global Income & Growth said: “Seneca Global Income & Growth’s performance comes from four sources: longterm exposure to various asset classes, tactical variations to these long-term exposures, investment in a concentrated portfolio of undervalued opportunities across key asset classes, and borrowing. Our modelling suggests these can combine to produce a real return of 6% over a typical cycle.”

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