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James Burns: A range-bound FTSE limits options

James Burns MM blog

The past 18 months have witnessed a fair degree of volatility in global stockmarkets due, among other reasons, to the European sovereign crisis, doubts over the sustainability of economic recovery in the US and whether or not China is going to suffer a hard landing.

What is noticeable is that correlation between markets has increased as movements are dictated by political intervention as opposed to market fundamentals. As a result many markets appear to be range bound.

This is typified by the FTSE 100 which has been more or less stuck between 5,000 and 6,000 since the start of 2010. As we lurch from crisis to policy intervention and back, it has become an increasingly difficult environment in which to generate positive returns for investors.

Although the FTSE would appear to be well supported around the 5,000 level, I cannot see a significant enough catalyst to drive the market through the psychological barrier of 6,000.

As I see it, there are four possible ways for multi-managers to outperform – become increasingly trade-oriented in your outlook and bank small profits when they occur before reinvesting at lower levels; focus on income-producing stocks which will deliver consistent and growing yields; target stockpickers, not quasi index trackers; and look for opportunities in the investment trust world, where narrowing discounts are able to add alpha to an already decently performing underlying portfolio

On the Smith & Williamson multi-manager team, we openly admit that our skillset is not market trading and although we have might have become more active at market extremities, our portfolio turnover has remained consistently low for several years.

This is not likely to change either. Income is most likely to play an increasingly important part of investment returns for some time and so we have made a few alterations to our portfolios to hopefully capture this.

Indeed, in our MM Endurance Balanced fund the two biggest holdings for some time have been UK income funds. We have always had a preference for stockpickers over those managers that have large portfolio lists that deviate only minimally from the index.

Although this can lead to heightened volatility, over the longer term, we believe good managers will outperform. Examples here would include Schroders’ Richard Buxton and Jupiter’s Alexander Darwall, both of whom run focused portfolios and will not own stocks they do not like.

Finally, we have used investment trusts extensively across our range of funds.

Over the past 12 months, we have benefitted from our exposure to the listed hedge fund sector, particularly those trusts which have, for various reasons, decided to put themselves into wind-down mode.

With the ability to generate solid, if unspectacular, returns while they run down their portfolios, coupled with a significant narrowing of their discounts, we have and hope to continue to generate decent returns from our funds as an alternative to traditional fixed-interest plays.

On a similar theme, we have for over a year now been particularly excited about listed private equity vehicles which trade on extremely wide discounts. Although this theme has not played out yet, we are seeing more and more examples of boards proactively looking to tackle these discounts or where shareholders have pressured them to do so.

Once again, we believe that this sort of activity will be of substantial benefit to our portfolios over the next 24 months.

James Burns is head of multi-manager at Smith & Williamson

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