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Three funds for market volatility

Daniel Lane

Daniel Lane - Fidelity Personal Investing

The markets may have their polemic periods of dizzying volatility and eerie calm but uncertainty never really leaves the investment arena.

As investors, we all respond to the ups and downs differently but really, reacting when things are still changing can be an act of panic rather than considered decision-making. We don’t tend to make the best choices under pressure so it’s vital we set ourselves up well beforehand - if nothing else, to save us from ourselves.

Here are three funds from the Select 50 that could help investors diversify their portfolios with volatility in mind:

Investec Global Gold

When the outlook turns particularly hazy gold often becomes the port of call for nervous investors but there is a lot more to the asset according to George Cheveley, manager of the Invest Global Gold Fund.

Rather than buying bullion, as many do in a flight to safety, the manager mainly holds a range of listed global companies focused on gold production. Cheveley and his team spend their time investigating and meeting these firms around the world. He explains the approach:

“We don’t invest much of our money in pure exploration companies and we don’t invest in companies below $100m in market cap so we’re not investing in very small exploration plays hoping they find gold. What we prefer to invest in are companies who are actually producing gold and producing cash as a result.”

The reason behind seeking out producers rather than the metal itself lies in the amplification effect a company can provide, especially when gold prices begin to rise. The manager explains:

“A company producing gold has a lot of fixed costs, so as prices rise their profitability goes up by a faster rate than gold does. In addition to that, companies are clearly exploring, finding and hopefully producing more gold so you get growth in production and volume, which again increases profitability. Particularly in a rising gold price environment we can see companies improving their operations, producing more gold, and adding to potential returns.”

All of this means investors can benefit from growth in the price of the metal as well as the company producing it. Even in a flat gold price environment a miner can cut costs to increase their margins and reinvest earnings into the business for future growth.

Fidelity Special Situations

For investors who know there is opportunity in volatility but would rather leave the execution to the professionals, a value contrarian approach can help. Fidelity Special Situations has a long history of ticking that box as a bottom-up stock-picking fund, looking for unloved or overlooked companies with the potential to provide investors with positive returns.

Manager Alex Wright describes his investment approach as “looking for stocks that other investors have tarred with an unfairly negative brush and which are therefore trading at below their medium-term value.” He then works hard to identify what the catalyst might be for that prevailing negative view to change.

The reason that value investing has tended to outperform over time is that profits and investment returns have a tendency to revert to the mean. When they are low, they can be expected to bounce back in due course.

Of course, it is possible that the rules of the game have changed thanks to forces like technological disruption. Because of this Wright undertakes deep due diligence on potential investments and taps into Fidelity’s large team of analysts to help him do the necessary research. This ensures that he can avoid so-called value-traps, shares which look cheap but which end up cheaper still.

Jupiter Absolute Return

Simple, good and very different. That’s how James Clunie describes the approach to investing he employs in running the Jupiter Absolute Return Fund. The manager aims to deliver a positive return for investors over a rolling three-year period by investing mainly in equities.

However, it’s not all one-way traffic in the manager’s use of equities in the fund, as he explains: “We’re different from other funds in that I’m actually net short of equities, so this fund would enjoy it if markets went down - that’s really unusual. It would also enjoy it if a number of other things went wrong in the world.”

The end result of the strategy is that the fund often moves in the opposite direction to a lot of other assets - an aspect the manager believes offers investors a useful tool to balance other investments in their portfolios, especially during bouts or market turmoil. But for Clunie, the diversification on offer plays second fiddle to the niche speciality the fund displays in seeking positive returns.

He explains: “I think we’re good at single stock short selling - identifying stocks that are likely to fall and benefiting from that on behalf of our clients. That edge, or skill, is developed through understanding data around negative news, practices and important behaviours in short sellers that we spend years training to identify. So, simple, potentially good through our shorting and very different through our risk profile - that’s how we differentiate ourselves.”

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.