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Equities have already endured some wild swings in the wake of the shock ‘Leave’ vote in the EU referendum and market conditions could remain choppy over the coming months given the continuing uncertainties over how Brexit will play out.
Prepare for turbulence
Volumes tend to be thinner during the summer as many experienced traders are topping up their tans on their beach but it does not necessarily follow that the market will be in a relaxed mood.
A little under 12 months ago global exchanges experienced the biggest one-day falls since the financial crisis on Black Monday (24 Aug 2015), as fears over the Chinese economy and its financial system escalated.
Small adjustments to a portfolio may now make sense, particularly to check you have sufficient diversification both in terms of sector and geography. The ultimate plan is to do as little as possible to avoid excessive dealing costs and the risk of selling depressed stocks when all the bad news is already priced in. The phrase ‘time in the market beats timing the market’ is particularly relevant.
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.
Buckle up
Research from BlackRock shows if you missed just the five best days on the FTSE All Share between 1995 and 2015 you would have reduced your final pot from an initial £10,000 investment from £45,519 to £31,316. Missing the best 15 days more than halved the hypothetical return and missing 25 days left you with just £13,506.
A good way of remaining constantly invested is to regularly drip feed funds into the market. You can also even out price volatility thanks to an effect known as ‘pound-cost averaging.
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.
There are a number of top performing managers in the UK delivering solid returns at low volatility, according to research by funds information service Trustnet.
Data produced by Trustnet on the least volatile, as measured by the standard deviation of returns in the first six months of 2016, is reproduced in the table below.
In addition, we’ve sorted this collection of the least volatile funds by return per unit of risk.
Top performer on this measure in the first half of 2016, according to Trustnet’s FE Analytics data, was Troy Trojan Income, managed by Francis Brooke.
Trojan, an equity income fund which has not yet updated the market with its June performance, reported its top positions in May as personal goods supplier Unilever, at 4.6% of the fund, followed by Royal Mail, tobacco giant Imperial Brands, Royal Dutch Shell and GlaxoSmithKline.
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.
Unfortunately, Trojan Income is closed to new investors though the company says investors may still be able to invest through fund platforms.
Close behind Troy is JOHCM UK Opportunities. The fund’s portfolio, run by lead manager John Wood, has a similar, low volatility, large cap look to it.
Its top position is energy transmission outfit National Grid, at 5.2% of the portfolio, followed by Royal Dutch Shell, British American Tobacco, publisher RELX and energy utility Centrica.
Also in the top three, Jupiter Income Trust, another equity income fund, features similar large cap stocks which will have benefited somewhat from a weaker sterling through June.
Holdings in the fund include BP, Astrazeneca, GlaxoSmithKline, insurer Aviva and Imperial Brands.
Low Cost Method
Adventurous investors looking to build their own low volatility portfolio could take a leaf out of the book of fund managers.
Filling portfolios with blue chip stocks like Royal Dutch Shell, Unilever and GlaxoSmithKline, these fund managers have more or less bought the FTSE 100 minus the banks.
Investors with a reasonable amount of experience could probably do a similar job and at a lower cost.
Among the least volatile stocks in the market over the last year are a few familiar names.
Utilities, because of their inflation-linked cash flows, regulated business models which feature high barriers to entry, are high up the list.
Energy transmission network National Grid was tied with water utility Severn Trent as the least volatile stock, though the former’s return in the past 12 months was far superior.
Close behind is water and sewage services provider United Utilities.
Almost as much of a basic necessity as energy and water, beverages giant Diageo is the next in the list followed by publisher RELX.
All five delivered positive returns in the year, with National Grid and RELX among the top performing stocks on a risk-adjusted basis in the last 12 months, as measured by the ratio of return to volatility.
In comparison, of the five most volatile stocks: mining companies Glencore, Anglo American, BHP Billiton, Antofagasta and emerging markets bank Standard Chartered, there were only two gainers.
It is worth pointing out, however, that two of the year’s most volatile stocks were the FTSE 100’s best performers.
Mexican gold and silver miner Fresnillo and West and Central Africa-focused Randgold Resources were the biggest gainers in both absolute and risk-adjusted terms simply because of their extraordinary triple digit gains over the year.
Probably the least well known stock in the list of top index gainers on a risk-adjusted basis is product testing specialist Intertek.
Disclosure: William Cain, who helped write this feature owns shares in BP and British American Tobacco.
This article is provided by Shares Magazine. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters and does not guarantee the accuracy or completeness of the information in this article.
Investors acting on the information in this article do so at their own risk and AJ Bell Media Limited and its staff do not accept liability for losses suffered by investors as a result of their investment decisions. Shares is published by AJ Bell Media Limited part of AJ Bell.
