Despite the S&P 500 registering a 20% fall since its all time high at the start of the year, Vincent Ropers, manager of the Wise Multi-Asset Growth fund, maintains active asset allocators can still thrive in bear market conditions.
While fighting inflation is the first priority for central banks, whose actions Ropers said, in turn, risk triggering a recession. He also said we are entering a “very atypical scenario”, which could see negative real GDP growth (growth stripped of inflation) but positive nominal growth (growth including inflation).
“Such an environment, while tricky to navigate, should allow some companies to grow their earnings and thus present attractive investment opportunities,” he said.
For Ropers, today’s bear market – an expression used to describe a fall of more than 20% or more from a previous peak – is a very different situation to the 2007-09 global financial crisis when huge levels of debt had to be unwound, unemployment was rising and consumers had no spare cash to spend.
“What we do know is that bear markets are always uncomfortable and tend to be volatile with numerous false rebounds, thus necessitating caution and diversification, but we are optimistic that current markets present attractive opportunities for active managers like ourselves,” he said.
Given the current macroeconomic uncertainty and the high degree of volatility, Ropers said investment trusts tend to see their discount to net asset value (NAV) widen.
“This typically happens when investors are keen to take their money out without much buying interest from other parties,” he said. “Those movements can be frustrating, particularly when the underlying portfolios are performing well – as is the case particularly with our alternative investments, such as private equity.”
“Panic-driven wider discounts tend to be short-lived however, and can present buying opportunities,” he added.
Using the example of Oakley Capital Investments, Ropers said its discount to NAV has widened by about 20% since the start of the year, despite reporting strong results in April.
“Similarly, Caledonia Investments is trading 10% wider than earlier in the year, despite reporting a close to 28% total return last year, driven mainly by its direct private equity portfolio, and announcing a special dividend equivalent to close to 5%,” he added.
“We would think that those sorts of results should put the trust on investors’ radar and help narrow the trust’s discount, but patience is required in the current environment.”