There are times when markets seem to go up forever and other times when they just go down. Then there are times like now when, quite honestly, they can’t seem to decide which way to go.
The Japanese market fell 9.71% on Monday 5 August and rose 7.86% on Tuesday. Other markets, like the US and UK, were a little more muted, but followed a similar path.
This article isn’t personal advice. All investments can rise and fall in value, so you could get back less than you invest. If you're not sure what’s right for you, ask for financial advice. Past performance is not a guide to the future.
Why are stock markets so volatile?
Usually, these sorts of market moves are because of some serious world event like Covid-19 or the Global Financial Crisis.
So, what caused the volatility this time?
Was it a surprise interest rate decision from the Bank of Japan? Maybe, but they didn’t move that much, and it wasn’t really a surprise.
Was it weak job creation numbers in the US? It didn’t help, but when you dig into the numbers it wasn’t really that weak.
Was it the unwinding of an overdone Japanese trade? Or US tech stocks falling? Or some careless comments from Central Bank officials? All maybes.
The exact cause isn’t clear, but one thing is – the fund managers we monitor are excited.
Why do fund managers like volatility?
It might sound strange, but the truth is, when markets are going up it isn’t usually a good time for fund managers.
Bad companies rise, along with the good, and there’s not much difference between good stock selection and luck. It’s even worse when the market rise is because of a handful of companies like we’ve seen in the US lately.
In this scenario, diversification rules mean it’s hard for fund managers to own enough of the big companies to keep up with the market, let alone perform better. But when markets fall, it’s time to get excited.
Now the good and bad companies fall in price. For a patient fund manager, who’s done their research and knows which stocks have strong underlying qualities, you can buy great stocks cheaper than they were a week ago. So, it’s time to go bargain hunting.
So, while volatility might be a little scary for regular investors, for skilled fund managers, now is the time to buy good quality companies at more attractive prices and hang on to them. And that’s just what a lot of the managers we monitor are doing right now.
Fund ideas for volatile markets
All of the active fund managers on our Wealth Shortlist are experts in stock selection, looking at each and every share in the portfolio, and deciding when is the best time to buy and sell them. This doesn’t mean that the funds can’t go up and down in value – they can and will.
But knowing you have an expert at the helm in times like this can be comforting, because you can stay invested in the market and leave any buy and sell decisions to the experts.
Here are two fund ideas for volatile markets.
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, use the links to their factsheets and key investor information.
Artemis Global Income
Artemis Global Income is managed by the experienced Jacob de Tusch-Lec. It invests in companies around the world, including those aiming to pay big dividends, those with moderate but growing dividends and unloved companies that could potentially recover.
The manager tends to look beyond the usual names that make up a lot of global income portfolios. They invest in out-of-favour companies at attractive prices (value investing), those more sensitive to the health of the economy and smaller companies
The current market moves are exactly the sort of time when value investors can usually find bargains.
The fund offers plenty of diversification, and no single company or sector makes up too much of the fund. It can invest in smaller companies and emerging markets, and although they don't currently feature in the fund, the manager can invest in derivatives, all of which add risk.
Annual percentage growth
31/07/2019 - 31/07/2020 | 31/07/2020 - 31/07/2021 | 31/07/2021 - 31/07/2022 | 31/07/2022 - 31/07/2023 | 31/07/2023 - 31/07/2024 | |
|---|---|---|---|---|---|
Artemis Global Income I Acc GBP | -15.28 | 34.06 | 5.20 | 4.18 | 30.52 |
IA Global Equity Income TR | -7.13 | 23.33 | 4.86 | 6.67 | 12.28 |
Fidelity Special Situations
Alex Wright has managed Fidelity Special Situations since 2008, with a contrarian approach. He looks for companies of all sizes that have had a tough time and been overlooked and undervalued by other investors, but could still potentially recover.
Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, the company must be on the road to recovery. A company can recover in a variety of ways, like introducing a new product line, expanding into new areas or hiring a new management team.
As the company improves, its share price should rise as other investors take notice. As the price rises, Wright gradually takes profits and moves on to the next unloved opportunity. Another example of value investing. Of course, not every company will recover, and some could fail altogether.
The manager has the flexibility to invest in derivatives which, if used, adds risk. The fund can also invest in smaller companies which also adds risk.
Annual percentage growth
31/07/2019 - 31/07/2020 | 31/07/2020 - 31/07/2021 | 31/07/2021 - 31/07/2022 | 31/07/2022 - 31/07/2023 | 31/07/2023 - 31/07/2024 | |
|---|---|---|---|---|---|
Fidelity Special Situations W Acc | -22.75 | 39.94 | 3.47 | 3.66 | 21.69 |
IA UK All Companies TR | -14.57 | 32.13 | -4.52 | 2.67 | 13.88 |