We can say that the last few weeks have been stressful for investors. We are now only a few steps away from a bear market, with the benchmark US S&P 500 index down about 18% between January 3 and May 12 (most observers consider a bear market to begin by a loss of 20%).
But this number hides massive variations. On my blog I have analyzed the dispersion of returns over the year to date and the numbers are extremely revealing. Of the S&P 500 stocks, 129 have posted gains while 175 stocks have already posted losses of more than 20%.
In the broad Nasdaq Composite Index of nearly 5,000 stocks, including minnows as well as leviathans, just under 20% of stocks – 948 to be precise – posted losses of more than 50%.
I take no pleasure in saying that much of this carnage was awfully predictable – valuations were running wild and macroeconomic conditions were deteriorating and deteriorating with frightening speed.
But British investors could have protected themselves, especially if they used a selection of listed funds, whether investment trusts or exchange-traded funds. I also looked at the performance numbers for these funds over the same period to see how more adventurous types might have fared.
Let’s start with investment trusts. Mixed in with the predictable, there are also some real surprises. You would have done very well if you had invested in almost any resource-based investment fund or any fund geared towards energy-rich countries like Brazil or Qatar. But I would be cautious about the ability of these funds to maintain these returns if the markets go into bearish mode. If we slip into a global recession, high commodity prices won’t stay high for long.
There were also, as expected, positive gains from investing in renewable energy funds. Foresight Solar, JLEN Environmental Assets, Greencoat UK Wind and ThomasLloyd Energy Impact all had a strong start to the year, posting gains of 10% or more over the period, helped by the resurgence in electricity prices.
One could argue that these funds will continue to benefit from the structural transition to renewable energy, but wholesale electricity prices seem disappointing to me. The handful of energy storage funds – GRID, Harmony and Gore Street – also posted impressive returns and no doubt benefited from these wholesale energy prices. But there is a long-term shift in favor of energy storage working its way through the system, notably fueled by this increase in renewable energy – which will only increase even if wholesale prices are falling.
Other winners include defensive multi-asset funds. Ruffer Investment Company, one of my long-term favorites, is in the lead, followed by Capital Gearing and Personal Assets. But the big winner was listed hedge fund BH Macro, whose share price soared, helped by a rising premium.
In the most surprising category, there are a few options that might be worth sticking with over the next few unpredictable months. A small group of equity funds focused on boring stocks with generous dividends did very well, led by Murray International, then the City of London Trust, Temple Bar and Henderson International Income. This focus on equity income has underperformed in recent years, but may be about to come into its own in these turbulent times.
Infrastructure funds such as HICL and INPP, which have been as boring as water from ditches, could now be a good alternative for the money. I would also highlight a handful of alternative asset funds, most of which I have championed and which have performed well year-to-date. Biopharma credit in specialty lending was a lackluster but strong stock, as was Digital 9 in digital infrastructure.
Special mention should be given to the complex beast that is Tetragon, which includes hedge funds and large holdings in a multitude of asset managers. Its stock price hasn’t budged in recent years, but it seems to have taken off in recent months and is up nearly 17% year-to-date.
Among exchange-traded funds, everything related to resources has also taken a lead. I would point to the small number of energy infrastructure ETFs, such as Invesco’s Morningstar US Energy Infrastructure Fund (MLPQ). These invest in everything from storage tanks to pipelines. Energy prices could come down, but I don’t see demand for these income-oriented infrastructure assets declining very quickly.
On the subject of energy, two index funds from Wisdom Tree and SparkChange that track European carbon prices via the emissions trading system have had a great run, albeit taking a kick immediately after the Russian invasion of Ukraine. Investor fears that green transition policies could be abandoned have yet to materialize and prices have rebounded. Continue to monitor this space closely.
If you’re looking for a defensive place to hide money from profit-taking, ultra-short-duration dollar bond funds have been a smart place to start — and may remain so. The relatively abundant supply of ETFs in this space has benefited from a strong dollar even though yields are low (but rising).
As I predicted, currency tracking funds that are long the dollar and short the pound – Wisdom Tree has one with the GBUS ticker – had a “pound” bear market. I think there might even be more to do before market volatility subsides.
Last, but not least, dividend-focused ETFs – that equity income theme again – which also performed well. S&P’s long-established Dividend Aristocrats range is a great place to start, but I would also point to Lyxor’s Global Quality Income strategy developed by SG as another excellent defensive spot in an uncertain market.
So if – and this is a big if – the markets remain choppy or turn even more bearish, what would I do? I would be tempted to evolve the classic approach of holding a core of low-risk investments alongside thematic satellite assets, but with a more defensive flavor. In the core, you might have Ruffer Investment Company and BH Macro, alongside something unexciting – say, an equity income fund like Murray International, City of London or Lyxor SG Quality Income.
Satellite investments would be built around robust themes and sectors. These can include battery storage funds such as Gresham House Energy Storage, Gore Street and Harmony Energy Storage, digital infrastructure funds such as Digital 9 and specialist lenders such as Biopharma Credit. If you’re feeling a bit more exotic, consider adding SparkChange’s Carbon ETF and Wisdom Tree Short Pound Long Dollar tracker.
The goal is to balance the boring stuff with ever-growing funds — constantly fueled by long-term drivers like decarbonization and digital infrastructure that even the darkest bears might recognize.
David Stevenson is an active private investor. E-mail: [email protected]. Twitter: @advinvestor. He holds stakes in Gresham House Energy Storage, where he is a non-executive director; macro BH; Numeric 9; and the Wisdom Tree Short £ Long $ ETF.