Veteran investor Jeremy Grantham recently said the US market has all the characteristics of a bubble that is primed to burst, warning we could be on the verge of another crash like the one seen in 1929.
Often an oracle at calling market crashes, he cited overvaluation and extreme investor behaviour as two preceding hallmarks of the biggest collapses in market history - two things which have been well-documented in recent weeks.
“I believe this event will be recorded as one of the great bubbles of financial history,” said Grantham. “Right along with the South Sea bubble of 1720, the Wall Street Crash of 1929 and the dotcom bubble of 2000.”
The veteran investor is convinced that this bubble will burst in due course, with devastating effects on the economy and portfolios.
“Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives,” he said. “It is intellectually exciting and terrifying at the same time, and a privilege to ride through a market like this one more time.”
With that in mind, Trustnet asked a selection of market commentators for the funds which investors could use to weather the storm of a market collapse.
Jupiter UK Special Situations
“Regardless of whether you subscribe to Grantham’s view that the US market is heading towards a 1929-style crash, there are investment opportunities closer to home that are compelling, particularly for those investors with a long-term investment horizon,” said John Monaghan, head of research at Square Mile Investment Consulting & Research.
“We believe that the Jupiter UK Special Situations fund is just such an opportunity.”
The £1.8bn fund has been managed by Ben Whitmore since 2006. Monaghan noted that Whitmore is a high conviction, long-term contrarian investor who seeks opportunities in companies that are out of favour. He has managed money in this style for most of his lengthy career.
Monaghan added that stock selection is determined by conviction, driven by the manager’s view of the quality of the company's underlying business and the attractiveness of its valuation.
The final portfolio, which normally consists of between 35 to 45 holdings, is constructed with less emphasis on the FTSE All Share index.
“This means that the portfolio can look and act very differently to the market at times and display short-term volatility,” he said. “However, risk relative to the index is not a major consideration for the manager who prefers to measure risk simply in terms of the potential loss of investor capital.
“For those investors with a longer-term horizon looking for a value-focused UK equities fund, the Jupiter UK Special Situations fund is certainly one worth considering.”
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Over a five-year period, the fund has made a total return of 38.98 per cent, compared to 46.13 per cent for the average fund in the IA UK All Companies sector. It has an ongoing charges figure (OCF) of 0.76 per cent.
Personal Assets Trust
The second pick, from AJ Bell analyst Laith Khalaf, is the Personal Assets Trust, managed by FE fundinfo Alpha Manager Sebastian Lyon.
“The S&P 500 is such an influential market that any steep falls are likely to be replicated in other equity markets,” said Khalaf. “Perhaps to a lesser extent if any sell-off is valuation-led, though bear markets don’t tend to be triggered simply by high stock prices.”
He explained that the traditional place to seek refuge if equity markets are falling would be in government bonds but argued that if an investor thinks US equities are in a bubble, they will likely take a similar view of US Treasuries.
“Tightening monetary policy is often a candidate for sparking a market sell-off, but in an environment of rising interesting rates, bonds wouldn’t be a great asset to own,” he said.
For investors worried about market levels, Khalaf suggested a mixed asset approach and recommended the Personal Assets Trust.
“These funds contain a mix of assets, so cover a lot of bases, and have a professional fund manager at the helm who can navigate switching between assets as market conditions dictate,” he said.
“I’d suggest having a few such funds so that you’re returns aren’t solely reliant on the decisions of just one manager.”
Performance of trust vs benchmark over 5yrs
Source: FE Analytics
The five FE fundinfo Crown-rated Personal Assets Trust has been managed by Lyon since 2009.
Over the past five years, the £1.4bn trust made a total return of 36.69 per cent, while the FTSE All Share made 44.81 per cent.
According to data from the Association of Investment Companies (AIC), it is trading at a 1.4 per cent premium to net asset value (NAV) and has ongoing charges of 0.86 per cent. It is not currently geared.
Janus Henderson UK Absolute Return
“As tempting as it is to try and pick something that could make money in a 1929-style collapse, I think that’s a challenge and therefore minimising losses or preserving capital might be a better approach, said Ryan Hughes, head of active portfolios at AJ Bell.
His pick is the £1.4bn Janus Henderson UK Absolute Return fund, run by FE fundinfo Alpha Managers Ben Wallace and Luke Newman.
“While absolute return funds have rightly had a bad press, the Janus Henderson UK Absolute Return fund is one of the good ones and has a good record of navigating its way through sharp corrections,” he said.
Hughes said the managers long/short approach is flexible enough to allow them to go net-short if they feel the need. They successfully used that flexibility in navigating the last financial crisis.
“Key to the approach is the management of risk and adjusting the net and gross positions accordingly, which is where many absolute managers have got it wrong in recent years,” he added.
“While the return may not be spectacular, preserving capital in a market crash is a fantastic way to make money in the long run.”
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Over the last five years, Janus Henderson UK Absolute Return has made a total return of 11.49 per cent, compared to 11.99 per cent for the average IA Targeted Absolute Return sector peer. It has an OCF of 1.05 per cent.
SVS Church House Tenax Absolute Return Strategies
Staying with absolute return, FundCalibre managing director Darius McDermott has gone with the £491m SVS Church House Tenax Absolute Return Strategies fund.
“While it sits in the much maligned IA Targeted Absolute Return sector, it is one of the funds that actually does what it is supposed to do,” he said.
The fund has relatively low exposure to equities with a 25 per cent ceiling, as the managers want to minimise the volatility of the fund.
Managed by James Mahon and FE fundinfo Alpha Manager Jeremy Wharton, the fund places a heavy emphasis on capital preservation and it is one of the few absolute return funds with a track record which goes back beyond 2008 and the global financial crisis.
“During the Covid-19 sell-off the fund fell 6.6 per cent, while global stock markets fell more than 25 per cent. Since the lows in March, it has returned 10.2 per cent,” said McDermott.
"It really came into its own in the fastest bear market in history when everything became temporarily correlated and really showed its worth in a portfolio. It’s also not vulnerable to any more shorting ‘wars’ between social media/retail investors and hedge funds because it doesn’t use shorting.
"If we are going to have another correction, this is a fund I’d like to have in my portfolio mix."
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
Over five years, SVS Church House Tenax Absolute Return Strategies posted a total return of 17.75 per cent, against a return of 11.99 per cent for the average fund in the IA Targeted Absolute Return sector. It has an OCF of 1.47 per cent.